Tag Archive: mark

  1. Developing a Pricing Playbook

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    Do You Have a Pricing Playbook?


     

    The Problems

    After a prolonged period of higher than historical average inflation, including large increases in many “core” input costs, you might reasonably think that most companies would now have a better understanding of their cost structures, track and monitor changes more closely, and know what to do with regards to pricing (in order to protect revenue and profitability) when they experience new and additional cost changes.

    But based on many recent experiences with small ($1M to $100M) to medium (>$100M to $1bM) sized businesses, which make up a sizable part of the US economy, if you thought this, you’d unfortunately be wrong.

    Working with clients of this size over the last few years, we’ve seen some reoccurring issues:

    • Insufficient data and subpar financial and business reporting, hampering correct and timely decision-making.
    • Not increasing prices enough to sufficiently cover the impact of cost increases on their bottom lines.
    • Raising prices in ways that hurt versus help long-term revenue and profitability.

    Pricing is Simple, Right?

    Rising costs? Raise prices.

    Cut costs. Capture value.

    Train and reward the sales team for adopting the right behaviors.

    We know these tactics work in concept, but in reality, it is never that black and white, and making the right decisions takes time and a lot of effort.

    Wouldn’t it be nice to have a “pricing playbook” that provides clear direction on how to adjust pricing quickly, and in ways that truly address underlying challenges and revenue and profitability goals while reducing some of the work?

    This playbook would provide step-by-step guidelines to address key profitability challenges based on the scenario at hand so that you could navigate changes and complexity strategically, confidently, and backed by data.

    Based on recent work we’ve done for some of our clients, developing such a playbook is possible, and not as hard as it sounds.

    Developing Your Own Pricing Playbook

    To get you started on your pricing playbook journey, we’ve compiled a handful of practices that will help your pricing decision making, based on changes to your costs, that support revenue and profit margin growth when rising expenses and volatile markets are at play.

    Practice 1 | Understanding Price Increase Economics

    Common mistakes when implementing a price increase include:

    • Not understanding the economics of a cost increase
    • Progress vs. perfection
    • Failure to make a timely call
    • Communication vs. negotiation
    • Lack of preparation
    • Not being resolute
    • Not tracking price execution and realization

    There is a lot of complexity that goes into executing any price change, from organizing and aligning your sales team through to managing customer expectations and ensuring that your actions will deliver the desired results, with minimal unintended consequences.

    This all starts with understanding the economics of cost increases and how the results of proposed price increases will translate directly to the bottom line to ensure profit margins stay on track.

    Consider the table below, which illustrates a scenario where costs go up 5%:

    Base Case Scenario:

    Costs Go Up 5%

    Pass Through:

    “Simple” $

    Pass Through:

    Same %’age

    Revenue $500 $500 $513 $525
    Cost $250 $263 $263 $263
    Gross Margin $250 $238 $250 $263
    Margin % 50.0% 47.5% 48.8% 50.0%
    BPS Impact . (250 bps) (122 bps) 0 bps

     

    While many companies aim to “pass through” the dollar impact of a cost increase via pricing increases (in this scenario, $13) in order to maintain total gross margin dollars at $350, the net effect of the “simple” pass through is a decline in margin percentage of 122 basis points.

    However, only when the pricing pass through is at the same percentage as the cost increase, is margin maintained at 50%.

    This may sound simple, but a surprising number of businesses do not look at cost pass-throughs in this way, thereby damaging gross margins in the process.

    Is this what you are currently doing?

    Practice 2 | Optimizing Price Increase Strategies

    Not all cost increase factors are made equal, and yet many organizations adopt a default strategy or typical approach no matter what the cost increase driver is, when alternative strategies and approaches might be better.

    Consider the table below, which outlines different cost increase factors, and “typical” versus alternative approaches to resulting price increases:

    APPROACHES
    COST FACTORS TYPICAL BETTER BEST
    Raw Materials Historical Averages Replacement Cost Replacement +

    Indices View

    Labor Rates Historical Averages Based on New Rates Based on Projected Wages
    Freight Expenses Use Estimates Use Actuals

    (Spot Rate)

    Use Actuals and Pass- through Margin
    Capacity Utilization Not Considered Price Adjusted based on Capacity Capacity Factored into Pricing
    Time Estimates Estimated Estimated, with Contingencies Track Actual vs. Plan
    Supplier Increases Pass through $’s with 30-day notice Pass through % and immediate (contract) Immediate Pass through % + markup

    Does your organization tend towards a typical approach, or do you consider alternative strategies?

    Practice 3 | Addressing Backlog and Customer Portfolio “Role” and Profitability

    If your company is experiencing a backlog of customer orders due to an increase in demand and / or a decrease in supply or resources, there are a few actions you can take now to help mitigate capacity constraints.

    Likewise, when is the last time you assessed the “role” of each of your customers in your portfolio to understand (a) their profitability and (b) their impact on your resource utilization, cost structure, and operations?

    Consider developing a customer “role” scorecard for the majority of your current portfolio (we recommend an “80 / 20” approach), similar to the example below:

    CUSTOMER = ABC Inc.
    LOW NEUTRAL HIGH
    Revenue X
    Potential Spend X
    Profit Margin X
    Relative Profitability X
    Share of Business X
    Tenure of Relationship X
    Ordering Behavior X
    Competitive Alternatives X
    Impact on Cost Structure X

    Undertaking this exercise may well deliver some very interesting and powerful insights on which customers to focus on for growth, what role each customer has within your business (i.e., their impacts on revenue and profitability), and where sales, marketing, and operational time and effort may best be invested.

    Likewise, from a pricing perspective, this exercise will likely show that you do not necessarily need to increase pricing across the board and indicate how you could be strategic with prices increases, by product / service offering and customer, to drive better overall revenue, profitability, and customer “mix.”

    Do you do this type of exercise on a regular basis?

    Execution is Key

    You can have the best strategy in the world, but execution is where the money lives.

    Unfortunately, we’ve seen too many companies attempt to increase prices, yet suffer unintended consequences, including achieving zero net benefit to their top or bottom lines, and negatively impacting long-term relationships with key customers.

    To counteract this, as well as helping them develop data driven rationales, backed up with supporting tools, we’ve worked with clients to empower their teams, communicate, engage, and establish buy-in and understanding (both internally, and with customers), and to measure activity to ensure the desired outcomes are achieved.

    Conclusions

    If you aren’t sure about the best route for managing pricing within your business, contact Core Catalysts to quickly assess where you might be losing money or missing opportunities, and then help you identify the best paths forward to manage and even increase your revenue and profit margins.

    Mark Jacobs, Client Service and Delivery

  2. Annual Budgeting and Strategic Planning

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    ARE YOU GETTING READY FOR ANNUAL BUDGETING AND STRATEGIC PLANNING?

    In the blink of an eye, we are already in the third quarter of 2024, meaning it will soon be time for most businesses to gear up for their annual budgeting and strategic planning.

    In almost every industry, markets have become more complex and variable, and economic dynamics maintain a high degree of uncertainty for 2025.  Setting the financial and strategic tone for the upcoming year should be of vital importance to your organization.

    Therefore, whether your company has a very formalized set of processes and meetings for annual budgeting and strategic planning, or takes a more “relaxed” approach, effective preparation could make the difference next year between growth and success or missed opportunities and challenges.

    Here are six suggestions for how you should be preparing and getting ready for annual budgeting and strategic planning:

    (1) Reflect on the past year

    Begin by reviewing performance to date and projections for year end, looking at available financial and operational reports, dashboards of key performance indicators (KPI’s), and any documented assessments of key business initiative project outcomes.

    Ask yourself the following questions:

    • Did we meet our financial goals?
    • What were our biggest successes and failures?
    • How did our actual revenue and expenses compare to the budget?
    • What were the trends, and what were the factors that drove these trends?
    • Were there any unforeseen expenses or revenue streams?
    • What current trends might carryover to next year, and should any new or emerging factors be planned for and considered for next year?

    This reflection will provide valuable insights into what worked well and what didn’t, forming a foundation for making informed decisions for the next year.

    (2) Set Clear Goals and Objectives

    Define what you want to achieve in the upcoming year.

    If you are functionally focused, think about the goals and objectives for the year, but be mindful that these will need to “ladder up” to broader business goals and objectives, including revenue and profit, so you should have a point of view on what these broader goals should / might / will be, and how your goals and objectives will contribute to achieving them.

    All goals should be specific, measurable, achievable, relevant, and time-bound (SMART).

    Whether it’s increasing revenue by 10%, launching a new product, or expanding into a new market, having clear goals and objectives will help you guide and contribute to any annual budgeting and strategic planning efforts.

    (3) Engage Stakeholders

    Any planning and budgeting process should be cross functional, engaging key stakeholders and incorporating different viewpoints. Diverse input and perspectives (backed by solid data) are vital for creating a comprehensive and realistic budget, projecting KPI’s and numbers for next year, and identifying and prioritizing business improvement projects and initiatives.

    Whether it is meetings and workshops, or iterating Excel spreadsheets or PowerPoint decks, collaborate with relevant stakeholders to gather input and insights to help you be ready for annual budgeting and strategic planning.  The goal is to be a key contributor in ensuring that everyone is aligned with the “end product” outcomes of the plan for next year.

    (4) Analyze External Factors

    No business operates in a vacuum. Therefore, whether it is analysis of market trends and opportunities, identification of competitive threats, or general assessment of important business assumptions that are somewhat out of your control (such as interest rates, inflation, etc.), incorporating relevant external factors into your budgeting and strategic planning activities is crucial.

    Have a summary of the key inputs / outputs of your external factors assessment ready to go for when annual budgeting and strategic planning begins.

    (5) Forecast Revenue and Expenses

    Detailed situational analysis and well-thought-through goals and objectives are great, but Revenue and Expenses are “where the rubber hits the road.”

    Create revenue forecasts based on clearly identified assumptions, ideally considering blends of different scenarios to come up with “optimistic,” “pessimistic,” and “most likely” projections.

    Likewise, estimate your expenses, including fixed and variable costs, and don’t forget to account for potential investments in new projects, technologies, or personnel, etc.

    Be prepared to walk through and justify your forecasts and projections, and try to ensure that you can update them “on-the-fly” as new information, updated assumptions, and input from other business areas comes in.

    (6) Prioritize Initiatives

    Many businesses struggle with prioritization: If you have 31 priorities, you don’t really have any prioritization!

    Work to differentiate between important activities and projects that need to happen to sustain and deliver “business as usual” versus the one or two (three maximum!) initiatives that are either vital to success or will truly “drive the needle” and have meaningful impact on business performance and achievement of goals and objectives.

    Also work with other stakeholders to evaluate the return on investment (ROI) of each and every potential project or investment, understanding that resources are finite and that not every initiative should be a priority, and in fact some should not “make the cut”.

    Be ready to make difficult prioritization decisions based on facts, data, and a realistic assessment of organizational bandwidth and capacity for change.

    If you spend some time preparing, including relevant parts of these six suggested steps, you should be ready and able to make a significant contribution to your organization’s annual budgeting and strategic planning.

    However, if you believe you or your organization needs more help, be it developing a detailed budget, implementing processes, technology, and tools for annual budgeting and strategic planning, establishing monitoring and reporting processes, or communicating goals and plans across the organization to ensure buy-in and alignment, Core Catalysts can help.

    To find out more about our Budgeting and Strategic Planning support services, reach out to us today!

    Mark Jacobs, Client Service and Delivery

  3. A 2022 Retrospective, and 2023 Predictions

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    Last year, we posed some questions for 2022 (see the original article here), based around a few common sense predictions on what was likely to happen in the year ahead.

    After the positive reaction to that post, we thought it would be fun to review how accurate our thoughts for 2022 were, and to consider what we think will happen in 2023.

    What did we predict in 2022? 

    Based on the experience of our collective team of consultants, our clients across multiple industries, and research into macro-economic trends, we suggested certainty around three key economic factors:

    1. The after-effects on Covid-19 pandemic would continue
    2. There would be supply chain and labor market shortages
    3. There would be high inflation

    Any reasonable assessment of 2022 would conclude that these predictions proved to be accurate.

    However, the subsequent questions that we raised ended up being less reliable predictions of what most businesses did (even though we still believe our recommendations were valid!).

    What actually happened?

    • In terms of our suggestions on Price Increases: many businesses instituted price increases in 2022, but based on anecdotal observation, many of our fears on the effectiveness and medium to long-term effects of poorly implemented price increases seem to have been well founded.

    In fact, many organizations were relatively slow to implement price increases in 2022, often waiting until later in the year, meaning much work may still need to be done in this area in the year ahead.

    • In terms of Data Literacy: we saw plenty of businesses come to the realization in 2022 that, in light of supply chain difficulties and other challenges, their data and reporting tools and capabilities left a lot to be desired.

    But in 2022 very little of this translated into the action (in terms of skill development and technology investment) we were suggesting. Admitting that you have a problem is the first step, but companies seem to be overwhelmed by the perceived challenges and cost of addressing these gaps (more on this later).

    • In terms of Automation: many businesses suffered from the labor market shortages we predicted for 2022. However, most businesses tried to address them by raising pay (on top of inflation driven increases), or tried to mitigate them and “struggle through”, hoping they could maintain output (but likely not growing as much as they could have, or achieving their full revenue and profitability potential).

    With everything that happened in 2022, many businesses focused on “business continuity” versus investment, believing that 2022 was “not the right time” to revisit automation. While we have a lot of empathy with the sheer magnitude of challenges that businesses faced and continue to face, we would contend that now is exactly the right time to consider automation opportunities, as the underlying drivers and business cases have the potential to fundamentally transform business performance.

    • In terms of Cost Structure and Expenses: it wasn’t until the third and fourth quarters of 2022 that we saw signs of significant “belt tightening”, as evidenced by the layoffs in big tech firms and the like, and many companies landing on their individual long-term policies and philosophies to flexible working etc..

    While it is true that labor is often a significant expense for most businesses (and therefore one that is focused on when reviewing cost structures), and that some businesses over-expanded their labor forces during the pandemic, we would argue that few business have yet done the work that we suggested: taking a deep and holistic view into how cost structures and all major business expenses have changed in light of the pandemic.

    As an example: it is only recently, and often driven by additional factors (such as the invasion of Ukraine, the reliance on Taiwan as a source of semi-conductors, and continued geo political concerns related to China), that some firms are taking a look at their supply chains and considering strategies including re-shoring and moving production from China either closer to home (e.g., Mexico, South America) or to other low-cost locations (e.g., India, Vietnam).

    What do we think will happen in 2023?

    If anything, uncertainty and ambiguity is even greater this year than last.

    However, three things we can be relatively certain of in 2023 are:

    1. The economic challenges of 2022 (inflation, dramatic shifts in supply and demand, wild swings in critical markets such as labor, housing, automobiles, and travel) and supersized economic policy responses to them will likely carry over to 2023.
    2. While a recession is not guaranteed, 2023 is likely to feature declining inflation and slower growth as we return to more stable equilibriums/new norms.
    3. Stabilization of supply chains will likely mean that job openings remain abundant (with the same “skill gaps” as 2022), but there will be fewer labor shortages, while declining inflation will likely mean that prices will revert to pre-pandemic trends

    So what questions should you be asking yourself in 2023?

    Last year we mentioned the term VUCA, which is an acronym for volatility, uncertainty, complexity, and ambiguity. Policymakers worldwide have warned of a more unstable period where global conflicts, pandemics and climate change are the norm, and 2023 will be a test of whether the world is truly entering a new period of persistent shocks. That is, ones that creates persistent supply challenges and makes it harder to maintain low and stable inflation.

    Therefore, we think one of our questions for 2022 (Data Literacy) carries through to this year, but in an even more magnified way: if 2023 is going to be even more VUCA than 2022, do you have the right data, at the right time, and the right people to interpret the data and make decisions as things change?

    If you do not, and want to start to understand this better or address the underlying issues, Core Catalysts is here to help you. We have completed multiple engagements in this area, and sourced multiple employees for our clients to manage the improved systems and processes we have put in place. We can show you that the challenges and costs of improving data literacy are not as overwhelming as you think, and the returns on investment are also clear and compelling!

    Likewise, we think our questions on Price Increases and Automation also still stand and carry over to 2023. Do you need help in analyzing, planning, and implementing price increases? Are you interested in identifying opportunities for automation in your business, and the costs / benefits / business case for doing so? If so, Core Catalysts can help!

    Finally, the other major questions for this year revolve around Expense Structures and Supply Chain.

    Expense Structure

    In terms of the question of expense structure, where we challenged you to challenge costs in light of the impacts of the pandemic on ways of working, we challenge you to do this again. This time, however, keep in mind the impact of inflation on the underlying margins and profitability of your business.

    You may have increased prices last year, but have you maintained your underlying margins, and will you be able to contain input costs and expenses this year so that price increases (if any) can be smaller this year?

    If the answer isn’t a clear yes, Core Catalysts can help you identify cost and expense management opportunities that maximize your efficiency and effectiveness. We can help you craft pricing and price increase strategies that will ensure that margins remain healthy in the short, medium, and long terms.

    Supply Chain

    Equally, last year we flagged the need to improve supply chain management in light of what we thought would be short to medium term shocks, but this year, despite the fact that China has reopened, we believe that continued Covid-19 related supply chain uncertainty there, plus geo-political policies and upheaval elsewhere (e.g., Ukraine, 2022 CHIPS act, etc.) means you should be considering your supply chain more deeply. Ask questions such as, “are my suppliers and manufacturing located in the right place?”, “what are my supply chain vulnerabilities?”, “what should I be doing to improve my supply chain flexibility and resilience?”, and “what changes to my supply chain can I make to minimize risks to revenue and profitability?”.

    Again, these are all things that Core Catalysts has helped multiple clients across multiple industries and situations both assess and address, and we’d be happy to discuss in more detail how we might be able to help you!

    Thank you for reading. We hope you enjoyed this article. As always, comments, questions, and invitations to provide more information are welcomed!

    Mark Jacobs, Client Service & Delivery

  4. Questions for 2022 Pt. 4: Automation

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    Today we offer the final post in a series focusing on questions for 2022. You can read the previous posts on data literacy, price increases, and expense control here, here, and here.

    This week, we further explore the opportunity to evaluate (or reevaluate) business cases for increased automation in light of the current business environment, and the likely continued knock-on effects of the pandemic.

    What we already know:

    As in previous weeks, let’s take what we know about 2022, and then apply it to the question.

    The current US labor market is unlike any previously experienced in recent memory:

    • A greater than expected death rate has reduced the like-for-like labor pool
    • Greater than average retirement rates have also reduced the like-for-like labor pool
    • A shortage of affordable childcare has also negatively impacted the labor market

    These and other pandemic driven factors have given rise to unprecedented labor shortages, pressure to increase wages, greater than average labor turnover (“The Great Resignation”), and HR nightmares all around.

    Great, but so what?

    The bottom line is that many businesses cannot find qualified candidates to fill open positions. Even when they are offering above market rates, putting revenue, profit, growth, and even long-term business viability at stake, there remains a shortage of viable candidates.

    This is where the question of automation comes in.

    In our experience as consultants, we’ve often seen clients consider the investment and business case for increased automation. This is across many industries and business functions, looking at everything from the standard evaluation of more efficient heavy machinery to consideration of exotic solutions involving robots and artificial intelligence, through to more mundane decisions on IT. Many times, even when the return on investment is clear and the business benefits obvious, they hesitate to make these investments due to perceived risks, the availability of labor, and the fact that their businesses could still operate satisfactorily without increasing automation.

    In most cases this was probably the right decision at the time. But the question now is, “Can businesses really afford not to consider and implement increased automation solutions?”

    If labor is a sizable part of your business expenses, and your labor costs are increasing, now is the time to look at labor saving and automation solutions no matter what the industry or function.

    In the past, automation investment cases may have hinged on reducing existing headcount. Now, they might revolve around the mission critical reality that people cannot be found to do the work that needs to be done for the business to operate.

    Equally, maximizing productivity and job satisfaction of existing employees in the tight labor market may also provide a compelling case for investment.

    Essentially, investment cases for automation may now be about more than just simple margin improvement, or cost takeout opportunities that previously you could afford to ignore or not do. They could relate and be the answer to existential threats to ongoing business sustainability.

    Conclusions

    If, for whatever reason, you have previously considered automation but decided not to move forward, it may make sense to revisit these potential opportunities.

    Now might be the right time to identify and evaluate automation opportunities. It might also be time to implement anything that is either a quick-win or that could be transformational, be that from an operational or financial perspective.

    Core Catalysts regularly helps clients identify opportunities for increased automation and build business cases to support investment decisions. We also aid in vendor selection through to project management and implementation of automation initiatives, across all sizes, types, and durations of project. If you believe we could help your organization, why not reach out to us to schedule a call?

    We hope you have enjoyed this series of thought-starters for 2022. Thank you once again for reading and please share any thought or comments you have.

    Mark Jacobs, Client Service & Delivery

  5. Questions for 2022 Pt. 3: Cost Structure and Expenses

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    This week, we’ll further explore the pressing need to review cost structures and all major business expenses in light of how business has changed (and will never go back to how it was pre-pandemic).

    What we already know:

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

    • Some jobs and activities will always be in-person, and some organizations now feel confident enough to mandate returns to the office. However, remote-working has become a fact of life during the pandemic, and many organizations and people may choose not to return to their old in-person, in-office schedules and ways of working.
    • Business travel expenditures are still radically below pre-pandemic levels. And yet, most organizations have found ways to overcome travel limitations to their business development, operational management, and delivery activities in the short to mid-term.
    • It’s too early to fully know what the future of the office and the commercial real estate market is, but it’s likely that many organizations’ future office space and design needs will be different (both during and after the pandemic). Warehousing and other real estate needs may also be different moving forward.

    Great, but so what?

    First off, have you re-evaluated your real-estate needs versus your current real-estate footprint, given how business has changed and how future requirements may be different in the future?

    Real estate costs (including rent, utilities, facilities, and maintenance) can be a significant expense in many businesses. If future needs translate to the need for less office space, what are you doing to realize these potential cost savings? Equally, if your real estate needs will be different, are you budgeting for any required capital investment, such as for physical updates to office spaces?

    Another outcome of the pandemic is a record demand for warehousing and fulfillment center properties, and other logistics related real estate. So, even if your office space needs haven’t changed, what about these kinds of needs? Rather than offering an expense reduction opportunity, this might even be another area of rapidly increasing (potentially spiraling) business expense that deserves further analysis and action to bring it under greater control.

    Secondly, have you adequately and effectively reallocated budgets previously allocated to business travel? Moreover, have you considered whether your organization will return to previous levels of spending after the pandemic?

    Reduced business travel has not reduced the need for facetime with customers, colleagues, and vendors. However, the fact that most organizations have managed so well despite less travel does suggest that returning to previous spending levels may not be necessary. Equally, even if spend can’t (or shouldn’t) be reduced, how is it going to be reallocated to ensure business results and ROI if old travel activities (conferences, junkets, etc.) are going to be less prevalent?

    Thirdly, collaboration tools such as Zoom, Microsoft Teams, and Google Meetings have improved significantly in the last few years, as has their utilization by many organizations. Gaps and opportunities still exist, however. Has your organization fully accounted for the likely hardware, software, and other financial and capital investment implications of the increased usage of IT collaboration tools?

    Some of these incremental costs may already be obvious and/or known, but some may be less so. As examples:

    • Giving employees regular home office “stipends” for equipment costs is becoming more common. Should you be doing this, and how should you reduce corporate office expenses to offset?
    • Providing the same hands-on hardware and technology support employees are used to in a corporate setting is harder and more expensive in a remote work setting.
    • Will a prolonged increase in remote working have subsequent bandwidth, licensing, hardware, and infrastructure implications (and if so, what are the financial implications)?

    If you haven’t already, now is the time to more deeply review the longer-term impact of the pandemic on your IT organization and infrastructure, and how this could translate to your financial bottom line.

    Finally, we’ve mentioned in previous posts that worker shortages (translating into higher labor costs) have been another consequence of the pandemic’s impact on cost structures. Reviewing labor costs should be another priority for most businesses, but this topic deserves its own deep dive and will be the topic of the next post in this series.

    Conclusions

    Changes in how many organizations do business, including the increase in remote work and reductions in business travel, offer opportunities to re-evaluate cost structures and business expenses. These changes also highlight the need to identify and evaluate future financial implications. Core Catalysts regularly helps clients assess financial and operational efficiency and effectiveness to understand and optimize business operations and cost structure. We’ve also helped multiple customers optimize their IT strategies and infrastructure to match today’s changing environment. If you believe we could help your organization with this, why not reach out to us and schedule a call?

    Thanks once again for reading and please share any thoughts or comments you have. We’ll see you again in two weeks for the final post in the series, which will cover the question of business automation during and after the pandemic.

    Mark Jacobs, Client Service & Delivery

  6. 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