Introduction: Getting Used to Supply Chain and Cost Turbulence

Inflation and supply chain disruptions have emerged as perhaps the most stubborn challenges brought about by the COVID-19 pandemic and then exacerbated by world events. News reports proclaim that inflation rates are the highest in four decades. It's true. In 2022, inflation, as measured by the Consumer Price Index, showed the largest year-to-year increase since 1982, according to the U.S. Bureau of Labor Statistics' seasonally adjusted data. Contributing to inflation are supply chain bottlenecks including disruptions in intermediate goods, semiconductor shortages, shipping interruptions, and labor shortages.

The good news is that the world is getting the coronavirus under control. The unwelcome news is that inflation and supply chain disruptions spawned by the pandemic will take years to stabilize. While lockdowns and business shutdowns are relics of the past, businesses face a post-pandemic future that is filled with challenges. The consequences of these challenges are now being felt by entrepreneurs and business leaders all over the world.

No matter what service sector you do business in or what industrial sector you operate in, inflation makes it imperative that business leaders make the right strategic decisions. Inflation complicates every aspect of running a business. Left unmanaged, inflation will quickly render profitable businesses marginal and decimate the product and revenue mix that in pre-inflationary times returned handsome profits.

The Importance of Leadership

Price success starts with an unclouded vision articulated by the CEO. Discipline and patience are next along with a tolerance for ambiguity. The results materialize after resistance and vetting from different stakeholders. When Parker Hannifin's then CEO Donald Washkewicz (he retired in 2016) took on the pricing beast, the company improved net income by over 500% and return on net income by 300%. What was Washkewicz's secret to success? It started with discipline. As the CEO, he took a focused effort to acknowledge that at least with some of its products, Parker Hannifin provided value it was not capturing.

The biggest problem Parker Hannifin executives faced was persuading company managers and sales professionals that they would benefit from the new pricing mantra. In the words of one executive, the company had to "reprogram the company's management DNA." One consequence: the company shifted to align pricing with that recognized value. The company developed the tools to help hungry salespeople effectively confront customers who were clamoring for lower prices. Washkewicz had the confidence to act on the basis of Parker Hannifin's self-professed mission statement: to be a supplier of high-value products and services. He used that knowledge to price with confidence. The Parker Hannifin sales teams took confidence from the CEO's direction and discipline. Results quickly showed the promise of starting with value and demonstrating to customers the benefits they derived from being Parker Hannifin customers. Since his retirement, the firm still has a core value of "quality solutions on time" and "ease of doing business," which in part continue to support strong earnings and revenue growth.

The CEO or president is usually the ideal executive to continually sponsor changes because, make no mistake about it, resistance to change is real and only a champion at the very top can pull the levers to drive change. Salespeople and their managers must know with absolute certainty that there is a place where the buck stops and attempts to go over the head of the change agent will be fruitless.

With this mindset, companies are ready to identify where and how certain products and services are superior to those of their competitors. Then someone is directed to lead the charge in recognizing that value, quantifying it, putting it into a competitive context, and executing it through an engaged salesforce. Armed with demonstrable value, salespeople can start to feel good about what they are selling. When a customer says there is no value, the salespeople remember who they are, what company they work for, and they begin to price with confidence using value conversations to find the win-win with customers.

As we've collaborated with firms over the years, we've found that for Pricing with Confidence to work, it takes a diligent leader to sponsor change, take control, and empower UVPF (Understand Value, Price Fairly), which is a core process within the organization. That leader may be the CEO as in the case of Parker Hannifin, or it could be the CFO or division president. In all cases, it's best if the senior executive leading the change reports directly to the CEO. That direct line of reporting sends the message that the CEO has the back of the executive leading the change. There must be no doubt among the departments that appealing unpopular pricing changes to the CEO is an effective strategy.

One of our first pricing training programs was with Intel. The semiconductor leader had an engaged senior leadership team but, just as important, they had a VP of Pricing who reported directly to the CEO. Intel made training a key element of the growth of their team and kept value and competitive price strategy at the core of what they offered. Evolving between a skim strategy for emerging technologies and a neutral strategy when the competition, in this case AMD, entered with matching products, Intel also used innovation of newer technologies as a key element of its growth targets for revenue and profitability. Today, Intel is one of the largest chip makers in the world with an astounding 30% net income.

Building the Value-Based Pricing Team

One of the most frequent questions we are asked is where, organizationally, the pricing team should reside in a company. The usual choices are within the marketing, finance, product management, or sales functions. The basic question is what do you want the pricing department to prioritize. Putting the pricing team in any of these areas means that they will comport themselves in line with how the departments are measured. Pricing within the sales organization likely says they will be more revenue focused; in finance they will be more invested in cost and margin; in marketing they will be more fixated on branding and promotion. If they land in product management, sales tend to focus on products versus the overall solution a company can offer. An effective pricing organization should focus on all of these and then some. Pricing is a team sport, but to be successful, pricing needs to focus on generating profit for the firm (Rule One).

Start with the End Goals

What would success for a pricing organization look like, especially given today's economic climate? We went out and asked this question of various leaders, mostly C-Suite leaders from assorted vertical industry segments. From these conversations, four key themes surfaced:

• Stop the bleeding
• Increase speed
• Manage risk
• Find insights that matter

Let's look at each of these themes:

1. Stop the bleeding. Undisciplined pricing practices are a profit killer. To stop the bleeding, discounting goes under a microscope and practices are put in place to stop profit leakages. One image in your microscope is your customers. We spoke to Andrew Fisher, founder and CEO of Myriad360, a West Deptford, New Jersey-based provider of IT infrastructure and solutions. During the pandemic, Myriad360 purposefully went from serving approximately 600 customers to 240 active accounts. The company purposefully fired its unprofitable customers. "The most unprofitable customers were taking up valuable resources and making it difficult to properly service high-value customers," Fisher said. The end result for the IT solutions company was a smaller revenue base, but higher profitability, higher customer satisfaction, and higher employee engagement.
2. Increase speed refers to making pricing-related decisions quickly based on market volatility. One client has a goal of "sub-second" price changes because they deal with raw materials, and the cost of those are constantly changing in these inflationary times. Speed of price execution is vital for their survival. Automation is fueling their speed. Any time companies can automate their pricing processes, especially for the long tail of customers, the more time and resources they can spend on more strategic customers, and they will continue to profit through inflationary times.
3. Manage risk. While every leader regarded managing risk from their individual perspectives of the markets they served, they all came to the same two conclusions. The first is that every pricing organization must make managing risk an imperative. The second is that diversification is the number one most effective response to minimizing risk. That includes diversification of markets, customers, products, solutions, and even supply chains. The CEO of a major IT manufacturer detailed how the company added more countries to their supply chain processes to mitigate the risks during the pandemic. Another response is customer customization, bespoke offerings, services, and pricing. With the cost of data storage coming down and our ability to do analytics in micro-seconds on large data sets, the world of customization is much easier to execute. This also leads to more collaborative go-to-market strategies with channel partners.
4. Find insights that matter....