Pricing for Resilience: Strategies to Thrive Amid Supply Chain Disruptions
Last month, tens of thousands of US dockworkers went on strike, generating a significant supply chain disruption on the economy that could have had a damaging impact for businesses across the United States. After a three-day strike, an agreement was secured that resumed business as usual. While this potential economic disturbance was averted, was your business prepared to respond? How will you respond to the next supply chain disruption?
Over the last several years, organizations have had to adjust their operational and pricing strategies to disruptions such as COVID-19, tariffs, labor shortages, natural disasters causing supply shortages, inflation, worldwide conflicts affecting trade, economic policy uncertainty, canal blockages, and more. Many businesses have been left vulnerable and unprepared, scrambling with subpar ‘just in time’ reactions in an attempt to shift their pricing strategies to effectively manage these supply chain disruptions. While some amount of uncertainty is guaranteed, businesses need to go beyond reactive, one-size-fits-all pricing approaches in order to protect profitability, minimize negative impact, and achieve longer-term growth.
To thrive in an environment where supply chain disruptions are expected, companies need to arm their pricing strategy with four key elements:
- A robust system of data analytics
- Relevant market intelligence
- Flexible and dynamic pricing models
- A repeatable commercial execution playbook
Arm Your Business with Reliable, In-Depth Data and Reporting
Does your business have the right level of data and reporting visibility to confidently understand where and how supply chain disruptions would impact profitability and growth? Best-in-class organizations leverage data-driven pricing and are armed with granular reporting that can easily parse out the details of which products are impacted and therefore which customers, regions, and suppliers require attention.
When costs increase, many businesses find it’s easier to implement a flat peanut-butter-spread price increase across products and customers. Often this is because it’s difficult to understand at a granular level which products and customers are most affected, without a significant strain on resources. While this approach may seem to safeguard net margins at the entire business level, it does not accurately reflect your unique business differentiators—your value, pricing power, product positioning, strategic customer relationships, or regional differences such as competitiveness—and can dilute margin over time. This is a seemingly safe short-term response that is neither sustainable nor profitable in the long term, and risks loss of volume, strategic customer relationships, wallet share, and ultimately, profit growth.
Arming your business with more in-depth analysis around the profit impact of supply chain disruptions enables smarter, data-driven decisions on how to adjust prices to manage margin or other growth goals most effectively.
Product prices are set based on a variety of factors, inclusive of cost, all affecting profitability. Price changes based on unknown cost changes can lead to misrepresented profitability and more difficult and complicated pricing decisions in the future. Visibility to the total cost-to-serve waterfall for a particular area of the business (product group, customer segment, region) enables businesses to understand exactly where and how profits will be impacted and develop proactive pricing strategies that limit negative impact and align with business growth goals and strategies.
Understand How Your Market and Competitors are Impacted
Organizations that leverage market intelligence have a competitive advantage when supply chain disruptions occur. Targeted market studies can answer critical questions like:
- How are my competitors affected by supply chain disruptions?
- What pricing actions are my competitors taking with their customers?
- How am I currently priced relative to my competitors?
- How do my customers perceive my value versus my competitors?
- How important is price to my customers when making purchasing decisions and how sensitive are they to price changes?
- What are the barriers to switching providers for my customers?
This market intelligence enables businesses to make data-driven pricing changes based on actual market conditions, reduce the risk of customer churn or volume loss, and maximize desired growth outcomes.
Consider two examples:
- Your business relies on offshore sourcing for certain products. When shipping rates spike, you apply a flat percentage increase to cover cost. But if competitors choose not to increase prices, you risk losing customers.
- You decide to absorb minor cost increases because you expect competitors to raise prices, positioning you to win more volume. However, if you’re already priced lower than competitors, you might miss an opportunity to adjust prices, cover costs, and potentially gain volume.
Pricing decisions should not rely on anecdotes or news reports, but instead should be rooted in market intelligence that enables growth-oriented, data-driven insights.
Implement Flexible and Dynamic Pricing Models that Reflect Market Conditions
Once your business is armed with data analytics and market intelligence, the next step is to utilize that information to meet business goals. Many organizations attempt to set prices product by product, aiming to protect margin while staying customer-friendly. However, this approach:
- Drains resources and delays timely responses
- Delivers only a one-time solution that needs to happen each time a supply chain disruption occurs
- Risks shifting from data-backed decisions to gut feelings of salespeople, instead of a smart blend of both
- May place an incorrect level of value on certain products or customers – i.e., already low-margin products or customers receiving a price promotion
To best adjust your pricing strategy for supply chain disruptions, organizations should develop pricing models that can be tuned and refreshed based on existing market conditions and business goals. A multifactor pricing model incorporates inputs like cost and key value-drivers to calculate optimal pricing. This type of pricing model will take into account factors the business has determined to be most important for pricing, including items such as order size, materials or labor required, freight and logistics, brand / product positioning, customer loyalty, competitiveness, packaging or engineering specifications, etc. As costs change, priorities shift, or other operational changes occur, the model can be tuned to produce appropriate recommendations without losing the integrity of the overall pricing strategy—and without having to review the changes in a line-by-line fashion. Investing in this type of approach enables businesses to respond quickly and confidently while minimizing negative impact.
Develop a Robust and Repeatable Commercial Execution Playbook
How prepared is your business to execute pricing strategy changes, particularly during volatile periods? Successful businesses have developed repeatable playbooks that enable confident execution for optimal results, including:
- Organizational alignment on the goal, the metrics, and the why
- Internal training on your value proposition, value-based selling practices, and scenario role playing
- Customer communication tools, like FAQs, sales scripts, and breakeven calculators
- Execution scorecards and metrics that enforce accountability
Internally, organizations need to build a strong muscle that they can confidently and quickly activate whenever these market shifts occur.
Externally, customer relationships should be positioned to expect ongoing communications around pricing strategies and other commercial policies throughout their lifecycle.
A pricing strategy alone is not enough. A strong execution plan ensures businesses achieve the desired outcomes from their strategies.
Managing Growth through Supply Chain Disruptions with INSIGHT2PROFIT
Economic uncertainty is inevitable, but with the right strategy, the consequences don’t have to be. INSIGHT2PROFIT can help your business identify and navigate the biggest risks to your profitability, co-developing a pricing strategy and execution playbook that is market relevant and aligns with your growth goals. Contact our pricing strategy consultants to learn how to set your business up to confidently weather market disruptions.
