Inflation is deflating the profitability expectations of too many companies lately. Demand has risen as economies recover, but so have supplier and materials prices.
This has generated huge downward pressures on corporate finances and profitability.
What to do, what to do? As a number of our own experts have pointed out, in both articles and videos of late, pricing can be the most powerful tool in your commercial arsenal for beating back the effects of inflation on your profitability and growth.
The Harvard Business Review apparently agrees. In this article, contributed by no less than four Bain & Co. consultants, the case is made yet again that despite the lurking terrors of inflation, there’s a path out of the current dark wood: Applying intelligent B2B pricing practices.
That’s much-needed reassurance for the C-suite and pricing teams. Especially when it seems all the news about B2B inflation is bad. As the article recounts:
Some businesses have started to raise prices in response, with producer prices in the OECD countries up 9% in the 12 months through April 2021. Consumer prices were up 3.3% over the same period (with the U.S. consumer price index well above that at 5.0% through May). Kimberly-Clark recently raised list prices on consumer products in North America, with percentage increases in the mid-to-high single digits. Consumers will now pay more for Pirelli and Yokohama tires and Energizer batteries. Hercules Industries boosted prices by an average of 15% on heating and cooling equipment, mainly due to rising costs for steel. Various chemical companies are charging more for polyethylene, one of the most widely used plastics.
As the authors tell it, one CEO told them that “the bottom line fills him with dread, as spiking costs for raw material, labor, and energy have reduced profit margins from 15% to 10%.” Many executives feel paralyzed; in B2B, many of them has already extended pricing relief to their customers, leaving them with precious little room to maneuver right now.
Five Best Practices in Intelligent B2B Pricing
The HBR article then offers up five best practices in intelligent B2B pricing that leaders can follow to salvage what could be a disastrous situation:
- Treat customers differently by making what they call “surgical” pricing adjustments, and don’t hesistate to “walk away from one low-value customer in favor of a more attractive customer or segment.” This is related to the pricing discipline that’s key to not panicking and automatically slashing prices as a first resort.
- Exchange price for other valuable features and offer extra benefits in exchange for price bumps, ranging from volume guarantees to bundled products.
- Enforce what’s already in the contract, as many companies may have price increase contingencies in the small (or large) print but choose not to exercise them.
- Consider indirect increases like surcharges for expedited shipping, inventory holding, and more; customer behaviors like rush order demands and such “should be tightened up,” as they put it. “The average industrial company loses over 6% of revenue through off-invoice discounts and leakage…set a firm policy for when you will allow deviations from preferred terms and what you will require in return.”
- Adjust the product mix. During inflation and supply chain snafus, what a company brings to market can be more important than who it’s selling to, so don’t hold onto marginally-profitable SKUs.
There’s much more in the article (and in our own webinar on the topic), and we’ve only touched some of what it’s got to offer. Our recommendation? Give it a read at your earliest opportunity and put intelligent B2B pricing practices to work. The tide of inflation isn’t going to wait for any of us.