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Editor’s Note: March 24 Ram Charan and other experts will share a new, multi-disciplinary approach—from communication to pricing to cost cutting—to help your management team fight inflation and win. Join us >
Pricing must not be controlled by the sales force. The dominant psychology of the sales and marketing departments in good times is to capture as many customers as possible and make every sale that is possible, often without thinking too hard about whether the sale is profitable or the customer is sound. They have a psychological aversion to raising prices, the result of frequent customer pushback and demands for discounts.
To help manage the situation, two innovations are needed in the structure of your company:
- A pricing unit, which is forward-looking, gathering data and building models. This should be a cross-functional unit that reports directly to the CFO and marketing leaders.
- A unit responsible for managing working capital, which reports directly to the CFO. (More detail in CFO section.)
These two units must work together, collecting information about prices across many different companies in many different sectors to form a context for the company’s pricing strategy.
In an inflationary period, delaying price increases can be a disaster. The company needs a pricing philosophy and methodology that shows with precision when, where and by how much to raise prices, fully cognizant of the consequences to volume, market share, revenue and margins. This will require close consultation between sales, the CFO and CEO.
Start by making sure the executive vice president for sales and marketing is aboard with leadership’s views and plans. If they can’t understand what you’re after or don’t grasp the urgency, the CEO will have to make a change—fast. Many of them have not lived through this. They will find it very difficult to have the courage they’ll need to make tough changes, like shifting their people’s KPIs to focus on raising prices and gaining cash or being more directly involved in collecting receivables.
The CFO and the CEO can’t expect these departments to change on their own. They must create training sessions to help get the marketing and salespeople prepared to operate in this new environment. For example, one retail company I work with was having a difficult time increasing prices selling to Walmart, one of their biggest customers. So, we got a former Walmart executive to come and role play with the team, showing them how to increase prices. This is the kind of work you’ll need to do.
With B2C companies, most will announce price increases gradually, not all at once. The key is to get ahead of the curve, not fall behind the curve. Many companies will balk at ramping up prices, taking a wait-and-see approach. They will absorb rising costs and try to grab market share from rivals. This is a mistake. Even if they weather the first year this way, as inflation persists, they will have deeply eroded their cash position, making them vulnerable and unable to catch up with rivals who were faster and bolder at raising prices.
Who will increase prices first, without delay? Those that go first will hurt the whole industry, but even if this feeds the larger inflationary spiral, you have no choice. If you do not move, you will be weakened for the months and years to come.
Companies—B2B or B2C—who have invested properly in digitalization over the past decade will now find they have a huge advantage over less digitally mature organizations. The ability to change prices dynamically at the level of individuals or single transactions has an overwhelming impact on margins and cash flow, while the data generated from these systems allows for continuous adjustments to the company’s projections and product mix, all huge competitive advantages at a time when knowing what the customers can—and are—willing to pay for is more essential than ever before. This is why I say that digitalization of your operations must remain a top priority, no matter what.
Whether you are a B2B or B2C company, the attitude toward customers must change as well. While the customer is still king, not every customer is a customer worth having. The CEO must know what is happening, not only to his company’s direct customers, but to their customers as well. The leader has to have the psychology and the mechanisms to delve deeply into the customer’s problems to help find solutions, but also has to have the fortitude and judgment to decide which customers are worth keeping and which should be dropped.
You must evaluate each customer, especially in a B2B business. What is this customer’s cash pain point, how are they going to absorb inflation, and how will they change their pricing and modeling? The same goes for understanding your competitors. A competitor who can’t or won’t raise prices, eliminate unprofitable products or evaluate customers may enjoy a temporary market advantage but will invariably weaken over time. The game isn’t won or lost in the first innings. You should map your whole value chain to model how inflation will impact your own business model and the business model of every link in the chain. Use this information to show customers why you need a price increase and how they can recoup that in their own business model.
Let’s be clear: Chasing revenue growth and market share without watching cash is a disaster during inflation. Customers who don’t pay in a timely way are customers you can’t afford to have for long. It is essential that you examine the value chain for each set of customers. Start looking right now at which customers—particularly in a business-to-business sales situation—have high debt. They will have a cash shortage. Work with them immediately to prioritize paying you.
Changing products will be at the heart of changing your business. If you had 35 varieties of one product, you’re going to have to narrow that down. But, as I said before, you can’t afford to dilute the brand by letting quality suffer—those who lived through the inflation of the 1970s have vivid memories of shrinking candy bars and soda cans. They left a bitter impression on customers that was hard to shake, even decades later.
The overall point is this: You have to look deeply at your company, product by product, customer by customer, channel by channel and find out where you actually make the bulk of your money—and eliminate anything where you don’t have high cash profits.
Every decision must take cash into account. You must look at cash profits, not paper profits, not percentages. Hard cash profit—because managing inflation is managing cash.