Three Ways to Manage Inflation to Minimize Impact
We aren’t telling you anything you don’t already know when we say that the current cost environment is wild: metal index trends are up 20-50%; freight increases range from 25% to 100%; plastic and lumber costs are high; and chemical prices have climbed. Whether these recent spikes are the result of long-term inflationary trends or short-term supply/demand imbalances, companies are at real risk of depressed margins if they’re not able to adapt quickly to changing market dynamics.
Market participants across industries are well aware of and have accepted the prevalence of cost changes, and so they expect the prices of your goods or services to increase. Take the opportunity presented by inflation to not merely raise prices to cover your increase in costs but to gain pricing power and drive profitability. Here are three ways you can use today’s inflationary market to win more.
1. Make Sure You’re Covering Your Costs
The first step is to ensure you understand how different cost factors – such as raw materials, freight, payment terms, labor – impact what we call your ‘pocket margin’, or the amount of money your business actually makes on each transaction. Do you have the proper data analytics in place to:
- Measure customer profitability,
- Identify how changing costs are affecting margins,
- And react quickly to market shifts?
In an environment of rising costs, it’s also important that you judge profitability not only based on your invoice margins but also on your replacement costs. If you’re selling existing inventory, your gross margins may be holding steady and giving you a false sense of security. Once you move through that inventory and need to start replacing it, however, rising costs will catch up with you and have a serious impact on your financials if you haven’t made the necessary adjustments to – at the very least – cover those increases.
2. Institute Differentiated Price Increases
It’s easy to think of price increases as a pass-through – your costs are rising X%, and you need to pass that X% along to all customers and products to maintain profitability. That broad-brush approach to price increases runs the risk of leaving money on the table in some instances or pushing price too far in others.
Because your customers are likely expecting price increases, this is your chance to correct price outliers and capture margin growth opportunities based on customer and product segmentation. Applying differentiated price increases (based, for example, on size of customer spend or product-level profitability) in an inflationary period will allow you to fully realize the value you’re providing your customers more easily than in a static cost environment.
3. Set Your Sales Team Up for Success with Coaching and Analytics
Deciding how to increase prices in light of rising costs is only part of the equation. The other part is preparing your sales team to successfully communicate and apply those increases to your customers. Buy-in is critical to the success of any new strategy, so it’s important that you explain to your team the rationale behind the price changes, as well as how they affect the company’s profitability and their own compensation.
Once the sales team understands the ‘why’, it’s time to talk about the ‘how’ – arming your sales reps with negotiation tactics and the right value messaging to support price increases so they feel competent and confident in their conversations with customers. Sales analytics scorecards can be created to track adherence to new price recommendations across sales reps, regions, or customers and to measure the impact on profitability, highlighting instances in which changes to the pricing model or additional sales training may be necessary.
The risk of absorbing rising costs instead of making them work for you is too high to ignore. If you’re in a 20% margin business and elect to absorb a 5% price increase, you’re giving up 25% of your profits. Having a pricing model that measures the impact of changing costs on profitability and can quickly implement differentiated price increases, as well as a sales team supported by coaching and sales analytics will allow you to move swiftly to take advantage of any market situation – inflationary or otherwise.