As prolonged inflation rises all over the world, many industries are struggling to cope with the Covid-19 pandemic’s economic damage. More companies are facing staff shortages, component delivery delays, and high costs due to supply chain issues. As a result, it has eroded margins of up to 10-15%. So how do you deal with both inflation and price?

 

The current consumer price inflation around the world soared about 7%, the highest peak in four decades. Since the 1990s, the Reserve Bank of Australia set its inflation target at 2-3%. But Covid-19 is pushing this further with labour shortages, supply chain disruptions, and high oil prices. 

 

 

According to the Consumer Price Index, consumer and food prices rose by as much as 7% since last year. Cooling and heating industries also had to increase their prices by 15% due to shortages of steel and other raw materials.

 

Some food manufacturers lost as much as $200 million due to rocketing prices. And it’s the worst that most businesses have ever faced in the last two decades.

 

In fact, since the second quarter of 2021, inflation and price from nations in the Organisation of Economic Development went up by 9%. To deal with this, a lot of B2B firms employed producer prices (also known as a price without the transportation fees, taxes, or the differences in retail and wholesale prices.)

 

In this article, we talk about how to mitigate pricing risks during inflation.

 

How can you put your team in a position of advantage? We argue that making the best decisions require a dynamic pricing capability using the appropriate tools and data analysis.

 

At Taylor Wells advisory, we believe that creativity and thinking outside of the box can help businesses innovate during challenging times. We address those B2B firms and management teams who haven’t dealt with inflation before and guide them on how to cope. And although it can be a daunting task to let customers know about price hikes link, those that take action right away perform better than their competitors. 

 

Inflation and Price 

 

For the first time since 2014, Australia’s inflation rate rose above 3%. Hiking prices in the consumer basket items such as food and property, according to Consumer Price Index affect the budget household of Australians. A major factor has been the Covid-19 pandemic which is expected to ease during Q3-2022, analysts predict.

 

Wages make a big impact on inflation rates. At the moment, wage growth is at 2.2% as they are dependent on how fast or slow the rate of inflation is. Dealing with inflation will require different strategies from the last 5-10 years.

 

Recent data from Rabobank shows, for instance, that food prices rose almost 3%. Last March, red meat hiked up to 8% as fruits went up 5% while vegetables are up by almost 7%. Food price increases 4.3% annually and is the highest since 2011 apart from increasing fuel costs.

 

Pricing Capability 

 

A survey from Bain & Company for 400 participating firms from all over the world showed that those below the $5 billion revenue are uncertain about their ability to manage inflation. 

 

During inflationary pressures, finance managers should perform a profit analysis catered to address different inflation scenarios. This allows a B2B firm to prepare before deciding on the best pricing structure from a supply and demand perspective.

 

Most companies perceive price increases during inflation as a fair reason. But customers often disagree as they’re at the tail end of every price hike. They absorb most of the impact of all the price adjustments from top to bottom.

 

During the pandemic, a lot of B2B companies implemented lower prices temporarily as a band-aid solution. But it doesn’t make sense to delay something that customers and suppliers will face anyway for as long as inflation continues. 

 

And those businesses that haven’t invested in processes to make their operations more efficient fail to respond competitively to market trends. For those businesses that face supply constraints, they will have to accept the inflation-induced price hikes in exchange for enough supply in their inventory.

 

Below are the 5 best ways to optimise your pricing capability to mitigate price inflation pressures:

 

1. Every customer is not the same.

 

The common step for B2B firms to take is applying fixed priced contracts or blanket pricing for a set period of time. Instead, surgical pricing is a better choice which is largely dependent on market position, brand performance, and psychological factors. 

 

This gives more opportunity for margins and volume capacity and the flexibility to exercise price elasticity, shifting away from concentrating on overall input costs. It also enables you to choose better customers within your target market.

 

2. Strike a deal that makes up for the price increase.

 

Naturally, some customers are more price-sensitive than others. And by offering other deals like bundled items and service trade-ins like free shipment for a certain number of bulk orders can often address the issue.

 

3. Recheck contract agreements.

 

Although most companies note down price increases in their contracts. But only a few consistently follow and implement it. So, it helps to be vigilant and double-check each contract for the different customers you work with. 

 

Verify if there are terms that were waived during certain circumstances or exceptions like the pandemic. A review of the contract also provides a better reference for your team to explain any price changes more accurately. 

 

Since most sales representatives would rather avoid difficult conversations about price changes, they need to be updated and trained with the latest, relevant data. Along with these changes come new sales targets that management has to upgrade its incentivisation plans. 

 

Thus, it’s best to inform customers right away (at least 60 to 90 days ahead if possible) to even out any protests and answer their questions.

 

 

4. Look into increasing other pricing terms.

 

An indirect price increase caused by inflationary pressures from the oil market and supply chain constraints can be passed on through lock-in or longer contract arrangements. 

 

Another way to do this is to employ a higher price on small volume and urgent orders. This gives the opportunity to maximise profitability and minimise cash flow leaks at the same time. Orders like these can make a firm lose as much as 6% in profit, according to Bain & Company’s “profit killer” survey. 

 

Your terms and policy should be adjusted in a way that addresses customer needs. It should also ensure that you’re not losing out on the deal.

 

5. Check your product range.

 

It’s part of managing link your inventory properly. Which items are best sellers and in-demand? Then minimise those products/services that sit on the shelf for too long. Focus on what is most profitable. Then maximise on stock-keeping unit operations because your product lineup is just as important as your target market.

 

How Inflation and Price affects Consumers – Price Inflation Index

 

Core inflation significantly impacts the purchasing power of consumers. It is influenced by multiple factors such as the volatility of food and energy prices as well as supply chain conditions. The Consumer Price Index, for instance, is frequently adjusted to regulate and match the changes in buying patterns. This is true for products or services that have a low demand. Pensioners also don’t benefit from inflation. But in the case of mortgages, borrowers do benefit from it.

 

Conversely, deflation or falling prices leads to a lack of wage increase and slow economic activity or growth. So, policymakers deal with this by regulating it back to more suitable levels. Fixing the exchange rate will not be the best solution for global inflation. That’s why bankers often look forward to maximising their ability to influence inflation rates as a step toward managing it which seems paradoxical.

 

Bottomline – Price Inflation Index

 

Before panicking or trying to provide short-term solutions, B2B firms must set which customers, wholesalers, channels, and distributors they want to prioritise. 

 

Some B2B firms choose to work on their pricing decisions based on renewal of contracts or profitability analysis. For instance, a B2B company could choose at least 10-30 stock keeping units for two distribution channels.

 

The ability to make the right pricing decisions helps a company improve its market position and brand promise. 

 

Unfortunately, most companies don’t think that a dedicated pricing department in their operations isn’t necessary. They only realise that there is a problem when cash leaks and profit loss become evident. And they take action when the lack of pricing structure when brings more damage.

 

A capable pricing team enables a company’s long-term financial profitability. That’s why working with a specialised pricing function and investing in their efforts will help you implement price changes whenever it’s necessary. 

 

For a comprehensive view on driving pricing strategies to maximise growth,

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Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?

If so, please call (+61) 2 9000 1115.

You can also email us at team@taylorwells.com.au if you have any further questions.

Make your pricing world class!

 

 

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