Renowned business consultant Ram Charan and I crashed the CEO Network's servers during a webinar on inflation in 2021. The result has been two of his books and countless articles that guide executives and board members to navigate recent inflation. As this wave of inflation recedes, we can reflect on what we have learned and prepare for future volatility. This is because these waves of inflation often come together as a set.
Pricing will be on the board’s agenda
The resurgence of inflation has put pricing on every board's agenda. Organizations that had previously paid little attention to price trends found themselves in a precarious position as inflation rapidly began to soar. However, this period also triggered a change in which the importance of pricing became embedded in corporate consciousness. Today, how companies monetize their products and services is no longer static, but a fundamental element of organizational strategy. This is a topic that has carved out a place on board agendas, reflecting its critical role in navigating market dynamics and impacting the bottom line.
Pricing Crash Course for Board Members
The past three years have been a period of intense learning for board members, with pricing at the center of many discussions. This crash course highlighted the differences in readiness and response between different organizations. While some companies adapted quickly, adopting new tools and leveraging informed teams to stay ahead of the waves of inflation, others hesitated. They were hampered by a lack of preparation and foresight, which wiped out their profits, which would take a decade to recover, if they ever did.
These recent stresses have brought to light what it means to be commercially agile, and board members have shared a front-row seat to this unique theater. Boards now benefit from codifying commercial agility to reflect shared experience, ensuring companies are well positioned to avoid future volatility, regardless of how well they handled the most recent wave. You can prepare yourself to deal with it.
Today's big question: Lower, maintain, or raise prices?
This is the big question of the day for almost everyone today, from the President of the United States to young salespeople. Most boards have recently advocated for upward price adjustments to address inflation. This was the sound. Tackling derivative questions is subtle, but from our perspective, the correct answer is often the opposite of popular opinion.
Price reduction discussion
“Input cost indexes are trending downward, so prices should follow.” This is a simple message, but it ignores three important points.
- Companies today need to increase their nominal profits (up about 10 percent since 2021) just to stand still. That is the effect of inflation. We are not pushing abnormal profits. That means the dollar is worth less and you need 10% more dollars to stay in business.
- Price cuts do not stimulate demand simply because customers are spending less.
- This argument has nothing to do with value. Very often, we find that inflation has increased the value of products. Think of machines replacing labor. The input of machinery may have increased by 10%, but due to inflation the price of labor has also increased by 30%. More on this later.
We recognize that our audiences are diverse and that reducing prices may be the appropriate course of action. But when you look at business through his three perspectives above, it becomes clear that the price reduction argument is hollow.
Arguments to maintain prices
Giving back hard-earned profits is extremely risky for companies. It is fair for the customer to ask for concessions, and you should always expect the procuring side to ask for concessions as well, but if you consider the question through points 1 and 2 above, the answer to this becomes clear. If your business is not generating higher real dollar profits and competitors maintain relative market share (albeit with declining individual revenues), the board favors holding the line. can do. Let's get back to our core argument: 1) Lowering prices prematurely can reduce profitability to the point that going concern is at risk. 2) If you are a price leader in a stable market and yet lower your prices, you have started a price war.
discussion of raising prices
Inflation not only increases costs, it often also increases values. In the previous example, the value of the machine increased by 30 percent, even though inflation only increased its cost by 10 percent. This price-value lens suggests there is significant headroom to continue to drive business strategy through price, whether through direct price increases, increased cross-selling, or other mutually beneficial actions. . If your product differentiates itself through labor replacement or augmentation (higher quality, less downtime, increased efficiency), it may be time to take a closer look at its value.
