As we emerge from the extreme volatility caused by inflation and other macroeconomic headwinds, leadership teams across industries are faced with new challenges navigating the complex dynamics of pricing strategy. Recent conditions have highlighted the critical role that pricing plays not just as a reactive tool, but as a fundamental component of strategic decision-making within organizations. As inflation subsides, it creates a unique opportunity for leaders to reflect on lessons learned and strengthen their position to best prepare for inevitable future volatility.
The strategic imperative of price adaptability
The resurgence of inflation was a stark reminder of the inherent fragility of static pricing models. Companies that had previously paid little attention to pricing now found themselves suffering rapidly eroding margins as inflationary pressures intensified. This situation necessitated a strategic shift, forcing leaders to rethink their approach to pricing as a critical component of their organizational strategy.
A key lesson from this period is the importance of agility and adaptability in pricing, recognizing that the value proposition of a product or service is a dynamic variable influenced by many complex factors.
Pricing strategy leadership decisions
Leaders in 2024 face a strategic decision: lower, hold, or raise prices. Executives seem to favor raising prices, while front-line salespeople and the media argue for lower prices. Each option has different implications for an organization's financial position, market positioning, and customer relationships. Our view is that raising prices is often necessary and is easier to achieve than many think.
Consideration for price reductions
Calls for lower prices due to a downward trend in market indexes are misplaced as they fail to recognize the importance of value. They ignore the business imperative to increase nominal revenues to keep up with inflation and stay in business. Moreover, the assumption that lower prices will automatically lead to a surge in demand is incorrect, especially in a market characterized by financial prudence.
Decision makers need to consider the impact of price adjustments not only in terms of cost trends but also in terms of the intrinsic value of their products and services.
Reasons for maintaining prices
For most companies, keeping prices constant should be the default posture, rather than giving back hard-earned profits. People often ask where price wars start, and this is the place. When the market is stable and players are in good relative positions, a price war is initiated by the market leader lowering their prices. Market participants who cannot quickly add the value needed to maintain their position respond by lowering their prices.
Management must recognize that this is unlikely to be a long-term situation and price increases will be necessary again. Inflation has subsided and some cost measures have declined, but not all. Projections suggest that the combined impact of rising costs and inflation will exceed that experienced in the 2010s. Therefore, if companies cannot achieve annual efficiency gains of more than 5% to maintain or expand margins, they should look to sales.
Reasons for the price increase
Raising prices is a lot more real than people think. Inflation is everywhere. That means when the value of the dollar goes down (inflation), you need more in exchange for the same value of goods. That means not only have costs gone up, but the value of your products has gone up too. You see that clearly today with wages. If you were selling robots today and you were focusing on a 10 percent increase in input costs due to inflation, you might be missing the bigger picture. In many cases, labor costs have skyrocketed by 30 percent, meaning the value of your robot has gone up by 30 percent as well. So you should be in a position to capture a reasonable portion of those profits.
This decision should be made after a thorough analysis of the price-value equation, taking into account whether the current price accurately reflects the value offered. Often times, the value axis is overlooked today, revealing that companies have a better chance of continuing to grow than the headlines would lead you to believe.
Pricing strategy: strategic over reactive
Our field conversations suggest that when faced with the question of whether to lower, hold, or raise prices, companies often predict that their strategic allocation is biased toward lowering prices 60% of the time, holding prices 30%, and raising prices 10%. However, this view is based on reactive measures rather than a strategic understanding of product value.
A more informed distributor would advocate a balanced yet bold stance, with only 10 percent considering lowering prices, 40 percent choosing to maintain current prices, and 50 percent choosing to increase prices.
This realignment emphasizes the importance of informed decision-making, rather than knee-jerk reactions to market pressures. It reflects a belief in the inherent value of the product or service offered, and it advocates for a pricing strategy that reflects the confidence the organization has in its value proposition.
Growth through confident price leadership
The combined impact of recent inflation and macroeconomic headwinds has prompted a pricing rethink within organizations. The challenge for leaders is how to navigate the complexities of pricing strategies and make informed decisions that balance immediate financial needs with long-term strategic goals. For many organizations, there is no reason to give back the gains they have made by raising prices. Be bold. Be the leader who approaches a challenging pricing strategy with confidence and set yourself up for sustainable growth.
