Why Enterprises with Fluctuating Raw Material Costs Need Strategic Pricing 🎳
Almost every industry, including groceries, white goods, technologies, and automobiles, are being impacted by escalating and unpredictable input expenses, such as raw material input cost inflation and fluctuation. And we all know that making a profit has gotten incredibly difficult. You might be thinking of adjusting your prices. But it’s tricky in an unstable business environment, isn’t it?
Price adjustments are not always well received by customers. Some would say that pricing changes are dismaying, inconvenient, and disagreeable. But what if your input costs, particularly, raw material costs, are constantly fluctuating? How can you keep your customers’ confidence and remain profitable? There’s nothing wrong with modifying your prices in these difficult times, but it has to be strategic.
In this article, we provide the best advice on how to optimise your pricing strategy to counteract escalating and unpredictable raw material costs, allowing you to retain customers and profits. First, we’ll go over the basics of input and raw material costs. Then we explain why raw material prices have been increasing and fluctuating in recent years.
Following that, we demonstrate how pricing can protect businesses from the hazards of unpredictable production costs. Finally, we present a step-by-step method for pricing your products and services in the face of cost volatility.
At Taylor Wells, we believe that businesses can readily respond to input cost inflation and fluctuation to prevent negative effects on profitability by working on pricing efficiency. By the end, you will understand how to successfully handle the highs and lows of raw material costs and prepare your company for whichever difficulties may arise.
Strategic Pricing When Input and Raw Material Costs Are Unpredictable
In times of business distress, pricing should be a top priority. Yet, many executives are hesitant to think about the consequences of rising raw material costs on their selling prices. This indecision may be motivated mostly by beliefs that they might harm their relationship with their customers. Even so, we think there are approaches to modifying prices while being profitable. To begin, let us define input costs and raw material costs.
What do input and raw material costs mean?
From the oldest trading routes to today’s online and modern markets, raw materials have almost always shaped the world’s economy. Raw materials encompass petroleum products, gas, metal, plastic, wood, and many more. What do we mean when we say raw material cost?
The cost of raw material refers to the amount necessary to buy the resources used by businesses to produce a product or even service. In many cases, the cost of raw materials guides businesses in establishing the final price of the item that they intend to sell. They set a raw materials budget plan by calculating how much they will consume over a specific time. This practice, however, has become increasingly difficult.
Most raw materials are derived from natural assets, which can be low in supply and frequently constrained. Since raw material cost is always fluctuating, firms must be familiar with its dynamics. Raw material cost is affected by supply and demand, therefore businesses should keep this in mind when conducting procurement.
It is crucial to carefully assess the number of raw materials you acquire because if you order too many, they may decay and become unusable over time. Nevertheless, if you do not purchase sufficient raw materials, the cost may escalate, forcing you to alter your budgeting. To properly manage your raw materials, you must grasp the variables that influence price fluctuation.
What causes the fluctuation and rising costs of raw materials?
In a recent study, 90% of participating supply chain and procurement managers report that raw material costs have risen substantially, and 76% anticipate a high or moderate spike in raw material costs in the coming months. Whereas, raw material supply disruptions or shortages have a serious impact on 45% of businesses.
Raw material costs have soared and continue to fluctuate all around the world, particularly in Australia. Here are some of the reasons why:
- Shoppers have switched to buying online as a result of physical stores’ closures during the lockdowns. The increase in online sales has put pressure on packaging suppliers and service providers to deliver things properly to our doorstep.
- China’s economy is recovering faster than those of other countries. As a result, China’s need for raw materials for production is soaring, further clenching the already overstressed global supply chain.
- Because of the uptick in home renovations and DIY, the construction sector has grown, but there isn’t enough equipment to process all of the wood needed to meet demand. This is aggravated by harsh weather, pests and diseases, or licencing concerns.
All of these factors, along with many others, interfere with supply and demand mechanisms and put a substantial strain on small and medium businesses, as costs for raw materials usually represent the biggest chunk of production expenses.
How can pricing counter raw material input cost inflation and fluctuation?
Rising raw material costs and instability are indeed troublesome, but they also bring an opportunity to boost pricing and uphold best business practices. You must only keep in mind that if you have to do everything strategically or your profits will still most certainly bear the consequences.
What characterises a strategic pricing structure? One that is founded on modern data analytics, driven by customer value, and supported by a systematic pricing implementation. With strategic pricing, firms can efficiently handle input cost inflation and fluctuation to avoid negative financial results sustainably and straightforwardly.
A strong pricing strategy can prevent any business’ financial condition from deteriorating and mitigate the impact of supply scarcity. In a changing business landscape, regular pricing monitoring, assessment and adjustment, as needed, enables organisations to adapt effectively and minimise the risks of unpredictable raw material costs. Furthermore, it may assist companies in producing stronger financial results following the pandemic.
What’s the best way to set prices when raw material costs fluctuate?
1. Assess the business implications of raw material costs.
For starters, gather your transaction records and data. Get hold of critical agreements, especially legal commitments and negotiations. You will make use of your past (up to 3 years ago) and present costs. Then, reconfigure your measurements to ensure an accurate analysis of how raw material cost changes affected your product prices. Cost, resource, and demand prediction efficiency should undergo evaluation.
An analysis that indicates the influence of cost increases on potential pricing changes and profits will help you develop a pricing strategy based on data insights and not just intuition. Moreover, this assessment will help you identify the rationale that you and your sales teams need to interact with customers credibly and consistently. The key benefit is that you may set a long-term pricing strategy to ensure sustainable profitability.
2. Consider implementing a dynamic pricing strategy.
A smart and dynamic pricing strategy can safeguard your profits during input cost inflation and fluctuation. However, the mechanism must be adapted to your business and economic environment. Do you own price-sensitive enterprise selling commodities? We know that the cost of raw materials heavily influences this type of business. That’s why concentrating on ways to delay passing on costs without losing income is key.
Whereas the said approach may be useful in a commodity enterprise, it may be detrimental in a company offering specialised, distinctive products and services. How should this type of company price its products? We observed that successful businesses in this field have used analytics tools to foresee changes in the cost of raw materials and supply-demand discrepancies. Consequently, they established tools to modify their prices.
Depending on specific circumstances, a value-based approach to pricing changes or a more gradual calibrated price rise to sustain margins as fluctuating raw material costs pass through production, inventories, and ultimately to products sold may be the top choices.
Businesses can also explore agreements with different raw material sources, modify product components to reduce the impact of the cost of raw material without sacrificing product quality, and revamp conventional costing procedures.
3. Train your sales team to explain the value of price changes to customers.
Offer extensive training so salespeople may feel confident discussing pricing changes with clients, producers, and distributors. For instance, you may host activities where sales teams act out customer discussions in a range of circumstances.
Various businesses we know implement comprehensive performance improvement training. This includes coaching, valuation, rewards, and performance indicators, as well as the use of advanced analytical pricing techniques. All of this serves to increase sales confidence and commitment.
4. Oversee your pricing strategy and how it affects your profits.
Implementing explicit pricing approvals procedures and clarifying managerial and performance systems that outline how customer queries are addressed and what evidence and authorisations are needed to make exemptions to a scheduled hike can tremendously assist you.
Pricing processes and performance assessments are usually too slow to deal with fast-paced situations. The management must swiftly and readily determine whether the company is on pace to meet its goals. This entails assessing achievements weekly or daily to identify where to devote more attention. If you do not already have a pricing team, we believe you will profit greatly from employing one.
Our findings show that with the right setup and pricing team in place, incremental earnings gains can begin in as little as 12 weeks. The team can capture at least 1.0-2.25% more margin after 6 months using well-researched price management techniques.
After 9-12 months, organisations are frequently generating 3-7% higher profits every year as they find more complex and previously unrealised possibilities, efficiencies, and risks.
The unpredictable cost of raw materials can be alarming. In our involvement with numerous firms, many delayed changing their pricing approach because they believe they lack the necessary data and analytic capabilities. That isn’t always the case, though. The truth is that most businesses have enough data to do fundamental analyses and take action.
Those that recognise the value and put the strategies we presented into action can invest more in their systems to identify more pricing potential. When combined with management initiatives, your company can succeed in managing raw material and input cost fluctuation like inflation that may come.
For a comprehensive view on integrating a high-performing pricing team in your company,
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 firstname.lastname@example.org if you have any further questions.
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