For our January Webinar, Joanne Smith, President at Price to Profits Consulting, explored pricing strategies that both help sustain profitability and bolster the confidence of sales in defending value-based prices during recessionary and inflationary times. After the session, she answered questions from the webinar audience. In this blog, we share her live answers.
For unique or high value products, where price is set based on value – not costs, how should they price through inflationary times?
It’s a great question here because frequently I see this misconception from folks with really unique products. “Oh, we are value-priced – only commodities raise price because their cost is going up or their market is tight.” And I would suggest that you are leaving money on the table if that is your approach.
When we do value pricing, we are doing it next to whatever those alternative products are. And my guess is during this time, those alternatives are raising their price. If you don’t, you don’t keep your premium that you clearly deserve over and above them. And further, because you are potentially the value leader in some of these areas, you almost set the stage. You make it tougher for your entire market to raise it if you, as the value leader, aren’t moving.
So I would absolutely rethink that and take advantage of the ability to maybe reset your entire market while maintaining that fair premium.
How can you support a price increase if the price of the competitors stays lower than your prices?
It’s not unusual for some of our competitors to price less than us – particularly if we have higher value, as they deserve to have a lesser price. The point is, does the market suggest that both of you or all of you should be at yet a different level? Do you all have a rationale that you should move up and your behaviors?
If we communicate clearly that we’re raising price, of course nobody follows it. If they don’t know, everybody’s looking for somebody to kind of lead that off, right? And so that they can follow underneath. So we have to be able to do that in a way that communicates the change well. We also absolutely have to do what we say, if we want to be trusted we can’t go say we’re raising price and then as soon as we get a big customer that’s bullying us, we get scared and back off. Those sort of things will give ammunition to our customers to go whisper to our competitors and that we’re not really raising price and they undermine us.
And of course there’s some tactics I can’t even go into here that if you have really aggressive competitors, what can we do to maybe minimize it? And what we surely are not going to want to do is just have a competitor just cherry picking our share if we sit by and ignore it and take no action. That’s just like telling them, “go ahead and keep doing it” – they will like taking candy from a baby. So we need to have some counter moves if we are having our share aggressively attacked by a competitor.
How should companies schedule pricing changes in terms of frequency, so as to not have them too often but also compensate for the cost increase over time?
That has been probably the most difficult thing over the last year and a half, because many of us thought we were doing the right increase and then – boom, we get surprised by more and more inflationary costs and then we have to move back out.
So to the extent that we have a good crystal ball, which we rarely do, it’s always better if we can minimize the negatives we put out. In other words, go a little bigger and less frequently if we can, right? Just like in marketing, anything we have that’s positive, we want to unbundle. So we get all those positive stories out there. I would say, look forward – your procurement people should be talking to their suppliers, trying to understand where you are. Many companies will price on replenishment cost so that they can get a bit ahead of those.
Sometimes we’re surprised, but I would always say the more you know about what’s happening and can give a heads up to your customer base that these are the dynamics we’re seeing, the better. We might not know the exact details, but we believe it’s coming – we’re getting wind that we’re going to get hit more and more.
Those changes can alleviate things when we have to go fairly frequently. And once again, to take this a little deeper, I would go more frequently perhaps on orders, people that not our standard customers. Move those costs along in a little bit quicker way. Those that are more in our base, you’re going to have to try and maybe minimize those. However, if you have metals that doubled overnight, you’re going to have to go more frequently. There is that balance of fairness to you and fairness to others and it will differ by industry.
How can we communicate price increases due to raw materials knowing that buyers may expect a discount when index prices eventually decrease?
I think everything needs to be done out of fairness. If we’ve said that “our input costs are up and then suddenly our costs are down, it might be eventually appropriate to give some back.
But let’s look at the bigger picture. Odds are that your labor costs are never going reverse back down. You might have one key raw material dropping but others may not be. You see what’s happening with logistics costs. So make sure you put it in context. And again, I go back to that 3-5 year view because even right now I hear people say, “so inflation’s down so you know, we have to give it back inflation.” If we look at where we are, it is still highest that it’s been in 40 years. So it might not be as bad as it was just a few months ago, but it is still increasing – just at a slower rate.
Make sure we put our answers in response to kind of a multi-year picture before we easily just fall for, “oh, you’ve got to give it back.” Maybe you will, but maybe it’s you’re going to wait a number of months because it took you time. Or maybe you’re going to partially give it back because you have other rationales that say, “yes, I get that that’s gone down, but these things are going up. We have had this margin decline where we have not moved our price effectively for years.” We need to keep things at that healthy level.