January 31, 2011
In the early stages of the global economic recovery, businesses are grappling with the challenges created by widely different economic circumstances in countries where they source raw materials from vs. countries where they sell finished goods. A recent Wall Street Journal article highlights how inflation in fast growing emerging nations like China and Brazil is skyrocketing, which in turn is pushing up raw material prices globally. This poses a serious problem for companies that derive a large proportion of their revenues from the U.S. and Western Europe. These companies have barely recovered from the recession and their recovery is tepid at best. The key question is how can companies raise prices for their products that they sell into these markets to offset the increasing price for raw materials?
It is a classic volume vs. margin issue. If a company decides to pass price increases onto customers, they can protect margins, but risk losing volume and market share as customers go for alternative products.
Effective segmentation and price setting based on pricing power and pricing risk offer a compelling path to mitigating the impact of these business challenges. Rather than increasing prices across the board, segmentation allows companies to identify certain customer segments where the company has the power to increase prices with limited risk to losing volume. The same way, they can identify segments where the company has limited power to raise prices without losing a significant amount of volume.
By implementing a pricing strategy that is aligned with different segment profiles, companies have the ability to take on the challenges they face while protecting both market share and profits.