For the past two years, most B2B sellers have struggled to maintain margins amid cost pressures emanating from seemingly every direction: inflation, labor costs, logistics challenges, supply chain snafus, conversion costs, and more.
Challenged simultaneously by inflationary pressures and the prospect of an economic downturn—with varying exposure across products, regions, and channels—companies also face uncertainty about the effects of central banks' economic policies. As a result, the ability to fully recover lost margins through pricing actions is proving elusive. As customers see inflation cool, they become more resistant to price increases; meanwhile, demand is weakening as global economies begin to soften.
That puts leadership in a bind: Raise prices too aggressively and risk a potentially serious drop in volume; respond to softening demand with price concessions and already thin margins shrink even further.
Yet, caught between a rock and a hard place, some companies have managed to avoid getting squeezed. They’ve taken a fresh look at their pricing actions and have carefully identified opportunities where they have room to raise prices while offering surgical concessions to maintain volumes without compressing margins unduly.
We’ve helped companies navigate these difficult waters using a three-step, rapid-response approach that quickly assesses your starting point and identifies the pricing actions you can take to restore margins and improve financial performance.
Assess your strategic position and risk exposure
Four factors are critical in determining the strength of your strategic position and thus your potential pricing responses.
- the relative strength of your balance sheet;
- the competitiveness of your key offerings;
- recent trends in market share growth or decline; and
- accurate measures of customer loyalty.
A company with a strong balance sheet and good market position, for example, might might want to selectively invest by taking targeted pricing actions to grow share with the right customers in key markets, while a company with weaker fundamentals may need to focus on preserving customer relationships and margins in its core markets while planning to accelerate out of a downturn
Before firms can finalize their objectives, they also need to assess two distinct forms of risk exposure: margin risk stemming from continuing input cost pressures, supply-demand imbalances, and control over key elements of the supply chain; and demand risk due to macroeconomic factors, competitiveness of offerings, exposure to volatile geographies, and channel mix (with a focus on their relative power to move volumes within key channels).
Know your archetype
Having assessed your strategic objectives, risk exposures, and market position in the context of key macroeconomic factors (see Figure 1), you can then determine the best pricing actions based on which of five archetypes best describes your firm. Broadly speaking, these five archetypes fall into two categories, with the first three playing offense and the other two playing defense.
Develop action plans based on your archetype
- Margin protectors will deploy price increases via inflation adjusters and a range of direct and indirect increases (e.g., surcharges).
- Surgical strategists will pursue opportunistic price increases combined with judicious discounting while focusing on improving their value prop.
- Opportunists can capture market share where competitors are weak and exchange price for other value (e.g., longer contracts).
- Careful followers will follow the market leader in price increases while reducing price leakages and tightening controls on discounting.
- Fighters will protect market share in their core from leaders by matching discounts, improving their value prop, and protecting strategic customers/segments.
Take the appropriate actions
As noted above, many companies will find themselves playing either offense or defense. However, firms with a broad range of offerings and geographic scope may find themselves playing both. The key is determining which parts of their business fit which archetype and developing detailed action plans at the account level to protect margins and volumes.
Margin protectors can include commodity inflation clauses in quotes and contracts, correct prices based on market dynamics and cost to serve, and/or pass along surcharges for costly customer behavior. For example, producers of plastic resins have changed contracts to allow for more frequent price adjustments due to feedstock cost volatility, and some distributors have gotten much more disciplined about enforcing minimum order-size policies.
Surgical strategists can make value-based price adjustments based on data that supports surgical increases, and invest in new pricing capabilities, such as a pricing center of excellence, to realize longer-term potential.
Opportunists can capture share by adjusting prices based on market dynamics and competitive positioning, and exchange price for other benefits, such as longer contracts, incentives for bundling multiple offerings together, and volume guarantees.
Careful followers have a range of options: use competitive benchmarks to closely follow market leaders, apply tighter controls on discounts and contract terms to stem leakage, establish clear discounting criteria and thresholds via defined approval processes or policy adjustments, and improve governance by clarifying accountabilities and applying data and tools.
Fighters can proactively protect share from market leaders by carefully defining core segments and offerings, matching discounts and service levels, and by focusing on profitable SKUs and channels to protect strategic customers and segments.
Accelerate out of the downturn
The most critical aspect of this three-part approach is to get extremely granular in defining your pricing opportunities, and then drive the appropriate actions plans down to the account level. Companies that do that well can chart a course through this period of uncertainty and accelerate out of the downturn, powered by a pricing strategy that avoids the margins-or-volumes squeeze.