Editor’s Note: Echter, a partner at Simon-Kucher consultants, will be among the speakers at our March 24 “Leading Through Inflation” masterclass, focusing on helping CEOs and their teams manage this difficult time. Join us >
Rising inflation will remain a way of life for companies at least through 2022, a leading pricing consultant said, but a surprising number of businesses have yet to react meaningfully to pricing pressures that already are evident. And that must change.
This is the view of Adam Echter, a partner at Simon-Kucher consultants and, as such, a leading consort of CEOs and CFOs having to make pricing decisions in this new era. He outlines a four-step process for clients to bring them to the precipice of these decisions.
“We haven’t seen everyone react yet,” Echter told Chief Executive. “One group saw it coming and moved early, and got ahead of it. And now there’s a reactionary group, a whole wave of [executives] who waited until the statistics said the inflation rate is 7%.”
Now, C-suites mostly have no choice but to deal with inflation realities and catch up with them. “Businesses are going to want to get back to what their legacy margins were,” Echter said. “But this is going to take time.”
Echter said that consumer-facing companies may feel more liberty to boost prices than business-to-business outfits do “because, broadly speaking, consumers have shorter memories. But procurement engines will remember [B2B price increases] for a very long time.”
Responses at a time like this can be major, in ways that even change company’s business model, or limited and tactical. One way companies are reacting, Echter said, is to increase surcharges “and other things that aren’t price adjustments per se but still have the effect of driving up the total amount paid by the next person. That’s something you can do if you don’t know when the pandemic-driven price surges are going to subside.”
On the other hand, Echter advised, more kinds of companies could create price-friendly options for their customers by introducing subscription-based services like those that have made Service as a Software startups profoundly successful in the Salesforce era.
“Think about industrial CEOs who may have very strict capital-allocation budgets: You’d expect them now to be more open to consumption-based models or subscriptions,” Echter said. “A supplier could use a commercial model to come in with $2,000-a-month robots while everyone else is still selling robots for $100,000 plus a $10,000 price increase from inflation.”
For company leaders who are still formulating a strategic and tactical approach to price increases, Echter outlined four major possibilities:
• A step change. “If you’ve been back on your heels as costs have gone up significantly, a step change probably will have to happen,” he said. “In the last year, we’ve seen boards push CEOs to plan for higher inflation than many CEOs have wanted to embrace. So they may need to make a step change [in pricing] if they haven’t done it for a while.”
• Systematize pricing. Many companies now are putting in new pricing systems and increasing their cadence of changes. “These systems can re-price quarterly or monthly, creating a new dynamic,” Echter said. “That wasn’t needed during the stable environment we had for decades but now people who’ve been slow to have such mechanisms are rolling them out.”
• Claw back on T&C. For years, he said, “Sellers got hammered down on terms and conditions. It was a buyers’ market, so sellers were on their heels. Now, during inflation, it may be a good time to claw back some T&C concessions. With scarce supply, you can raise prices or go to 30-day instead of 120-day terms. Or tell customers you’ll only ship full trucks of goods—no partials—or they have to come and pick up the truck themselves. You won’t do milk runs anymore.”
• Consider surcharges. “A B2C company might just add a charge or up the price or do surge pricing,” Echter said. “With B2B, people have longer memories. But you can still get away with good, old-fashioned fuel surcharges. Go back to 2020: People were putting PPE surcharges on bills. You can do little things to help offset.”
All told, Echter said, if CEOs fashion an approach using these four tools, “they will have done what they need to align themselves to the market and put systems in place that are more reactive and faster. They’ll have cleaned up their contract terms and added surcharges.
“And when they get to the top of the cycle and need to start conceding some things on price, having had all of that on the table will put them in a better position—giving back surcharges and on T&C—without having to give up on price.”