Tag Archive: inflation

  1. Questions for 2022 Pt. 2: Price Increases

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    Two weeks ago, we wrote about four questions for 2022 based on factors that we can all agree will influence our business this year. We went further and addressed the first question: Is your organization data literate enough?

    We’ve received some interesting comments related to the need for greater data literacy in organizations. This would enable better examination of weak links in the supply chain, operations process improvement in areas susceptible to disruption, and generally increase organizational flexibility and dexterity across all functions in response to this new “VUCA” world.

    This week, let’s dive into the second question we raised: Should you be considering price increases?

    What we already know:

    Once again, let’s take what we know about 2022, and then apply it to the question:

    • It’s generally accepted that inflation in the United States is currently running around 7%.
    • Unprecedented supply chain challenges and labor disturbances brought on by the pandemic have throttled output. At the same time, the pandemic has increased various costs (such as increased expenditure on PPE, safety protocols, etc.) leading to both increased business expenses and decreased productivity.
    • Conversely, unprecedented fiscal and monetary stimulus has turned demand in the opposite direction to supply.
    • Unemployment rates are at historical lows, creating additional worker shortages and upward pressure on labor costs (meaning additional incremental business expenses).

    Great, but so what?

    No one knows whether current inflation rates will be a short-term aberration or a long-term reality.

    Equally, while supply and demand-side economics may eventually achieve equilibrium, it is highly likely that post-pandemic business expenses will be higher than pre-pandemic ones, affecting profit margins.

    In order to maintain profit margins, businesses can do three things:

    • Decrease expenses
    • Increase prices (to increase like-for-like revenue)
    • Increase volume (to decrease relative costs, increase relative margin through economies of scale, and boost revenue)

    An oft-quoted McKinsey study succinctly lays out the comparative effectiveness of these three strategies:

    “A price rise of 1 percent, if volumes remained stable, would generate an 8 percent increase in operating profits – an impact nearly 50 percent greater than that of a 1 percent fall in variable costs such as materials and direct labor, and more than three times greater than the impact of a 1 percent increase in volume.”

    Put simply, like-for-like, price increases are far more effective than the alternate strategies.

    In the context of 2022, one could also contend the following: While effectively implementing price increases is difficult, it will be even more difficult (nigh impossible) to cut your way to margin maintenance or to increase volumes significantly enough, bearing in mind the expense pressures we are all facing.

    But there’s the rub: effective implementation of price increases.

    The stigma of price increases

    We’ve been involved in multiple price increase projects, and we can tell you the following:

    • Most organizations don’t like asking for price increases (and are bad at implementing them when they do)
    • Most customers don’t like price increases either
    • More than 50% of the time, the net impact of price increases (after concessions to big customers) is either break-even, or negative
    • Done badly, price increases can (negatively) affect customer relationships.

    However, can your business afford not to raise prices right now? If you cannot, what should you do?

    Build your business case for the price increase

    Data disarms. It’s hard to argue with evidence of increased expenses outside of your control, and customers with professional procurement functions will appreciate a fact-based approach.

    Communicate clearly

    In addition to a clear business case, customers respect vendors who communicate clearly. Your message should reinforce shared values, mutual respect, and commitment to an ongoing and mutually beneficial business relationship.

    Plan, Plan, Plan

    Achieving effective price increases is an important muscle in your business. If you are out of practice, the best way to overcome this is to invest the right amount of time, resources, and executive oversight into planning and managing your price increase activities.

    Conclusions

    Based on the extreme levels of expense increases your business is experiencing, you may have no choice but to consider increasing prices. This does not mean that expense reductions are impossible or inadvisable (see the third post in this series), or that increased labor costs cannot be mitigated longer term (see the fourth post in this series), but increasing prices effectively is going to take some time and effort, and you may not have all the resources, experience, and expertise to do this on your own. If this is the case, Core Catalysts may be able to help!

    Thanks once again for reading. Please share any thoughts or comments you have, and we’ll see you again in two weeks for the next question in the series: Have we adequately reviewed business cost structures and all major business expenses in light of how business has changed?

    Mark Jacobs, Client Service & Delivery

  2. Thought Starting Questions for 2022

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    It’s that time of year again. Businesses are going about making confident predictions on what the next twelve months will hold for them. And yet, even at the best of times the accuracy of these predictions will be questionable by December. Given all that, perhaps the point of these predictions is less about being right, and more about creating engagement for the marketing folks?

    But as we all know, we are not living in normal times right now. No one can really see into the future, and it is not possible to be completely sure what the next year holds. Just as well, your time is valuable, so why waste it reading another set of bold predictions for 2022 that have questionable value just to boost someone’s marketing metrics?

    To this end, we humbly offer you a brief series of thought-starting questions that might actually be helpful and worth pondering if you are considering the year ahead. This will be the first of many blog posts to follow in the coming weeks, all of which will explore these questions a little more thoroughly.

    2022: What can we be confident about?

    There are three things we can be relatively sure of:

    • The Covid 19 pandemic, and its effects on business, are not over yet.
    • Specifically, supply chain issues and labor shortages are going to continue to be concerns for most of us for at least the next twelve months.
    • Higher inflation is definitely going to be an economic factor for the next twelve months, and possibly longer.

    How do these factors influence what I should be thinking about for this year?

    If you agree with the three driving points identified above, four key questions for 2022 stand out. These questions are linear and feed into each other. They are:

    #1 Does my organization have the right level of Data Literacy, and is it in the right areas and functions?

    There are some real-life “nuts and bolts” things that most businesses need to be thinking about and working on in this area.

    #2 Do we need to be considering Price Increases?

    And if they are needed, how do we actually implement them effectively, as opposed to just talking about them but not doing anything, or trying to implement them and just ending up upsetting our customers and / or not achieving any financial benefit.

    #3 Have we adequately reviewed business cost structures and all major business expenses in light of how business has changed?

    And what’s more, will it ever go back to how it was pre-pandemic?

    #4 Should we revisit (or visit for the first time) business investment cases for enhanced and increased automation?

    Historically, whether or not to invest in automation has been a decision based purely on ROI and ease of implementation. If wage inflation and labor shortages continue, increased automation may cease to be a choice and become a necessity to ensure operational viability, continuity, and long-term business sustainability. In other words, can you afford to not automate more?

    Exploring Question One

    This week, let’s dive a little deeper in thinking about the question, “Does my organization have the right level of Data Literacy, and is it in the right areas and functions?”

    What we already know:

    Once again, let’s take what we know about 2022, and then apply it to the question:

    • It’s generally accepted that inflation in the United States is currently running around 7%, and no one knows whether this is a short-term aberration, or if it will be a longer-term reality.
    • Based on current lifespans, average retirement age, and the law of averages, at least 80% of the current working population have no experience living or managing a business in a prolonged (or even relatively short) period of such high levels of inflation.
    • Likewise, most people working today are used to Just-in-time (JIT), Kaizen, and other lean manufacturing and supply chain practices (implemented across the eighties, nineties, and aughts, creating significant cost savings in a time when economies struggled) and either have not experienced or barely remember a time when things worked differently.

    Great, but so what?

    Well, the challenges of 2022 mean that having people who can work with current IT systems, pull data, and then report on and take standardized or rote actions just isn’t enough anymore.

    What businesses now need are people who can interpret the stories behind the data. People that can develop insights and actions that consider imperfect supply chains and labor availability are in high demand. These are people that can see the many complex dependencies and interdependencies, both internally and externally, that are either hidden or are not things that businesses previously had to worry about (pre-pandemic).

    Recognition of a deficit in required data literacy in many organizations is the reason why it is so hard to hire demand planners, business analysts, and supply chain specialists right now. This deficit isn’t just a supply chain and manufacturing issue. It spans across all functions, including administrative functions like HR (such as labor planning, scheduling, etc.) and finance (such as maintaining margins during times of extreme changes in expenses/revenue).

    The question, then, is as follows: Do you have the right people with the right skills to interpret and manage through a time of great variability and ambiguity? We’re in business territory that most people have never experienced, and businesses need skills and experience that perhaps they once had, but that have also likely atrophied after an extended period of disuse.

    Conclusion

    Your answers to this question will probably lead nicely to the next post on price increases. A subset of data literacy is the ability to pull together all the information needed to identify whether or not price increases are needed, how much they should be increased by, and the data that is needed to justify increases to customers. Even if you have this capability, when is the last time you asked for a price increase, and how well did it go?

    Here at Core Catalysts, we’ve helped multiple clients analyze their data literacy. In doing so, we’ve also helped clients identify issues and opportunities with meaningful impact to their top and bottom lines, and then helped them fill important gaps in organizational capabilities. This allowed them to take action to capitalize on available opportunities, spanning everything from IT system evaluation and implementation through identifying and hiring new employees. If you believe we could help your organization with this, why not reach out to us and schedule a call?

    In the meantime, we hope reading this article and thinking about these questions has been worth your time. We welcome comments and additional thoughts, and please reach out if you’d like to talk more about your current organizational data literacy and tackling some of these challenges!

    Mark Jacobs, Client Service & Delivery