Are You Raising Prices Fast Enough?
Many sectors of the U.S. economy are facing inflationary pressures. Raw materials cost, transportation and logistics cost, and labor costs are all reportedly increasing. In response, companies in impacted industries are considering or undertaking price increases. Many are, but not all.
If you are an executive and your business is being impacted, the question isn’t if you should respond, but by how much and how fast?
On the cost side, we have seen
- Increased raw material and packaging costs across a number of industries due to the U.S. imposed 25% tariff on imports of steel, and a 10% tariff on aluminum in March of 2018.
- Increased paper costs impacting newsprint and the paper industry in general due to the U.S. imposed 10% tariff on Canadian paper in June 2018.
- Logistics costs increases due to tighter labor market, higher fuel prices, and rising interest rates. S. Business Logistics Costs rose 6.2 percent in 2017, and are expected to have risen faster in 2018.
- S. wages and salaries increased 2.8 percent on an annual basis as of June 2018 according to the Bureau of Labor Statistics: This is the largest gain for labor since 2008. Concurrently, the populist movement towards a minimum $15 per hour wage continues to garner interest.
And on the price side, we have seen:
- Procter & Gamble announce a price increases for Pampers and Bounty’s in July 2018. Kimberly-Clark similarly announced price increases for Huggies and Viva in August 2018. Both cite inflationary cost pressures, specifically paper pulp.
- Hershey Co. announced 2.5 percent average price increases on average in August 2018 citing rising costs.
- United Parcel Service reported higher Q2 2018 revenue partially driven by higher base pricing.
- Coca-Cola plans to raise its prices this year, citing rising freight costs and metals (canning) costs. CEO James Quincey stated, “There is some broad-based push on input costs that have kind of come in and affect ours and many other industries as well.”
In short, evidence is mounting that many U.S. business are threatened with higher than average inflation in the coming months.
Most U.S. businesses are not accustomed to high inflation. In fact, the U.S. has enjoyed a rather benign inflation since 1982. Currently, the inflation rate is still low, but many economists are warning that inflation could return soon, unless the Federal Reserve thwarts inflationary pressures with higher interest rates.
Successfully managing businesses during high inflation is difficult but possible. Companies operating internationally may learn from their subsidiaries in Argentina, Columbia, and Turkey. Focus the learning effort on information, decisions, and communications required to drive prices higher, stay in-line with the market, and keep customers engaged.
Learning from companies in other countries, we find common imperatives to undertake in response to price volatility. These imperatives are related to building the organizational ability to flexibly adjust prices in response to changing market environment. Specifically:
- Improve information feedback loops that increase the business’s ability to detect competitive price changes and price increase opportunities. That is, improve business intelligence to capture competitive price moves in near-real time.
- Define the processes and tools to analyze business intelligence, historical price trends, and cost changes to develop a fact base that informs pricing decisions on a timely (monthly and potentially weekly or daily) basis.
- Re-evaluate the price differential between long-term fix-priced contracts, and spot prices in terms of risks of input and opportunity costs increases.
- Prepare to increase prices quickly and inform customers of the price increase, along with the cost drivers of the price increase. In some cases, pre-emptively communicate to customers of the potential cost pressures facing your industry and the potential need to increase prices—in a fair and equitable manner.
Executives, who have built a pricing organization and have begun tackling the challenge of managing commercial policy as well as list prices, will not be facing a large leap. Redoubling efforts and raising pressure on the pricing organization should be expected.
Executives that haven’t addressed their pricing capabilities, meaning they haven’t built organizational expertise in people, process, and tools, will find the impacts in costs and on harrowing prices. It isn’t too late to address this shortcoming and get Pricing Done Right.