Combat Inflation with Advanced Pricing Tactics

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Combat Inflation with Advanced Pricing Tactics

A guide to Install and Exploit Essential Pricing Solutions

Inflation is taking a hit on organization's margins. While it aggravates existing pricing issue, it also presents an opportunity to install structural best practices like tactical pricing and data and AI-driven methodologies. How are you combating inflation driven pricing challenges?

Unprecedented inflation, geopolitical tensions and material shortages are putting pressure on industrial companies to manage their pricing functions with speed, discipline and precision. This can be overwhelming, especially for organizations that are not so mature or have not prioritized pricing. Fortunately, there are methods to fast-track the installation of pricing tools, measures and processes to improve pricing effectiveness and to limit P&L deterioration. Advanced Analytics and Tactical Pricing form the cornerstones of this approach.

2020 and 2021 were whirlwind years for the industry and organizations once again look at another year full of uncertainty, which are triggered by extraneous events such as the ongoing COVID-19 pandemic and Russia’s invasion of Ukraine. Soaring demand, accellerated by surplus of cash, commodity shortages by production and supply-side disruptions as well as skyrocketing energy prices have turned inflation into one of the biggest deterrents to growth.

The impact is especially severe for manufacturers with a high percentage of costs coming from commodities, production and delivery. While for now variable costs are most affected, fixed costs (e.g. labour, rents) may follow soon. Without an end in sight, companies are torn between passing on price hikes to their customers or absorbing huge margin losses themselves. 

In such disruptive times, a strong tactical pricing or margin management function can be instrumental in helping companies stay afloat. This review explains how companies can install solutions that fast-track pricing capability developments, restore commercial control, increase pricing agility and make them more resilient. 

To install a Pricing function that is lean and fitting for the organisation, there are three questions that business leaders must consider:

  1. What information and insights are needed to support decision making? 
  2. How should we organise ourselves? 
  3. What should we steer on and how?

Required insights on the buy, build & sell side

Insight Into Procurement and Supply Trends 

Commodity supply markets are volatile, but the ability to predict input cost trends can give organizations an edge in negotiations with suppliers and customers. Moreover, it allows to identify parts of the product portfolio that are most affected (Refer to Deep-dive 1). AI-models are advanced in simulating (via Markov Chain Monte Carlo models) and predicting demand and price effects (by Reinforcement learning) in supply chains and show tremendous benefits. While black swan events can hamper efficacy of models, it is sufficient to understand the timing and direction of input-cost fluctuations rather than the exact value of increase/decrease. Why? Simply because the cost of slow response is higher than that of acting too late.

Insight Into Proposition Differentiation 

Not all offerings are created equal or equally appreciated by customers. As a result, they command different degrees of pricing power in the market. It is essential to understand these drivers of power to be able to assess the true nature of a proposition (Refer to deep-dive 2) to be able to apply differentiated pricing and negotiation tactics. Is it a specialty, commodity or growth product? This determines the choice of the pricing methodology from value-based pricing to cost+, competitive pricing (See deep dive 3). Advanced analytics and AI solutions, like cluster-wise price elasticity models, offer nearly plug-and-play solutions to reveal this distinction and help set prices (Refer to deep-dive 4).

Insight On Client Negotiations & Contracting

An understanding of the customer negotiation behavior and business needs is essential. The first step is to review existing contract structures, and in particular the flexibility of passing on price corrections. Furthermore, it is important to understand the differences in customer context, willingness-to-pay (see deep dive 5) and negotiation levers, such as customer lifetime value, locked and free volumes or churn risk (Refer to Deep-dive 6) as well as the true nature of a customer relationship, based on Kraljic models. Finally, it is critical to have deep insights into these accounts and train sales on (large) account negotiation tactics.

The best way to get organized

Most organizations operate in matrix structures with pricing at the crossroads where product offering and sales execution meet. The “ownership” of the product portfolio and price positioning lies with business/product/category management, whilst Sales operates as the “owner” of the customer base and executes negotiations and contracting. It is here at this cusp where the opportunity lies to get tactical pricing organized, ready to direct pricing execution on short term.

Review the Pricing Org. Structure

The first step is to take stock of the current price setting and price getting roles in the organization. Does pricing take place in formalized roles and meetings? Are price discussions triggered by contract renewals or new negotiations? How are price reviews and margin management performed? Often, the structures needed to install tactical pricing and margin management already exist but are not correctly configured or utilized but can be with minimal effort.

Piggyback on IBP and S&OP Platforms

Integrated business planning and sales & operations planning have long been dealing with the complexity of reaching agreements across different functions (manufacturing, supply and demand, sales) to resolve tactical issues. Since the similarity to tactical pricing is high, companies therefore can simply add the tactical pricing agenda to the existing meeting structures in place.

Interventionist Pricing Control Towers

In organizations where operations, information and decision making are siloed, it is a good idea to install a Control Tower. Here a mandated/ empowered taskforce composed out of product management, sales, and if needed, demand and supply planning come together facilitated with data, analytics, scenario simulation capabilities, to analyze events, assess impact, simulate pathways and take decisions on topics such as how, when and how much price increases/decreases to pass on to customers.

Steering pricing to meet business objectives

Pricing is sometimes used as an umbrella term for all the price-related activities that take place within an organization. There are different levels of pricing, however. At the outset, there is strategic pricing, which focuses on brand positioning, portfolio, product line positioning and makes use of price bands and discounts. At the other end of the spectrum, we find operational pricing, which encompasses the plain execution of pricing guidance by sales and marketing. Tactical pricing is often neglected but arguably the most essential– especially when it comes to passing on inflation or dealing with volatility. Tactical pricing bridges the gap between the strategic and operational levels. It is about determining tactics on customer groups or segments on a short to medium time frame and addressing market/competitor cues. Tactical pricing dictates how to deploy differentiated pricing tactics towards customers as well as ensure pricing and margin compliance, governance and control. The key success factors of tactical pricing are:

Objective Setting & Governance

It is essential to steer sales execution based on tactical parameters (for example an x% input cost-hike, margin leakage from low-price outliers, churn risk and market upsell/cross-sell potential). Sales management and product line management should have a handshake agreement about the objectives and monitor compliance. 

Differentiated & Dynamic Deal Price Optimization

Flat price increases are blunt instruments. Input-cost price hikes must be identified and connected to both the product and the customer portfolio. The next step is drafting clear price instructions, dynamically defined, for sales to execute towards the customers. To maximize deal value, sales can be enabled with deal optimization insights (customer willingness to pay, product price elasticity, attrition risk, volume upsell and cross-sell potential). This creates a more individualized deal guidance per stock keeping unit per customer. 

Cost to Serve, Contract Terms & Surcharging

Transparency on a customer’s true pocket margin, after factoring in leakages from freight, samples, servicing and marketing costs, is critical for sales. Similarly, it is not enough to define differentiated service levels on the basis of cost drivers and value impact for the customer. Indeed, it is more essential than ever to adhere to these different service levels and monitor their execution, especially when it comes to top cost drivers like minimum order quantity, standard order frequency and consignment stocking. Leakage outliers should be cleaned up regularly.

Conclusions

In today’s turbulent economic environment, agility and precision in pricing can make the difference for companies, especially in commodity and other dynamic sectors. The time is now for business leaders to optimize their companies’ pricing practices by taking advantage of the latest pricing expertise and technology. Out of the wide space of “Pricing” two elements can be lifted to expedite successful implementation of crucial measures to counter margin erosion: Installing a tactical pricing function and apply Advanced Analytics.

How can Deloitte help

Frontline Profitability Analysis. A online 360 self-assessment on all aspects of pricing filled out by key pricing stakeholders can deliver a detailed pricing maturity mapping of your organization on a strategic, tactical operational and enabler level. Providing full insight in how to roadmap pricing capability development.

PriceCypher. The AI-driven industrial dynamic pricing solution that is bundling all essential and actionable insights on dynamic pricing, portfolio pricing and deal-optimization, to sales in any desired system (ERP, CRM, CPQ, Excel). Without system implementations, full transparency is created on portfolio pricing down to deal pricing.

Value Recovery Campaigns, are the most very effective approaches in crafting and effectuating pricing capability in your organization. It is entailing strategy, tactics, digital, technology, operational and change components with full focus on execution at deal level and with immediate effect on your profit and loss.

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