July 8, 2011
I was visiting a chemicals company last week and was told they just put through their third price increase in as many months. They thought this was a temporary blip due to a sudden surge in the price of raw materials, and hoped that they would soon be able to return to the days of the Annual Price Increase. I’m not so sure.
It got me thinking about the new velocity of business.
As inflation comes roaring back into the world economy, the problem is compounded by the fact that our counterparts in the purchasing departments have invested in systems and technology. They have become more sophisticated in protecting themselves from rising prices: adopting the simple method of extending contract duration. However, they have also started to use price protection clauses and locked in terms so that subsequent surcharges such as a fuel levy are impossible to apply.
What should be our response to these initiatives? My co-blogger, Colin, has already discussed strategy (Groupon: A Lesson in Bundling as a Pricing Strategy), but as well as strategies, systems also need a tune-up for higher speeds.
Here are some ideas:
- Review all contracts with terms greater than one year
- Require all contract extensions or new multi-year contracts to go for approval
- Institute new terms which allow for a quarterly price review
- Set up a reporting mechanism such as a new waterfall element to capture the cost of price protection, and include this in your pocket margin calculation
- Ruthlessly look at efficiency of your contracting processes: you will be doing a lot more of it
When the French introduced their high speed trains they were called TGV: Train à Grande Vitesse (at high speed). Are we ready for PGV: Pricing à Grande Vitesse?
– James Marland