The renowned business consultant Ram Charan and I crashed the Chief Executive Network’s servers in 2021 with a webinar on inflation. That work went on to become two books and countless articles guiding executives and board members on navigating the recent inflation. As this inflation wave recedes, we can reflect on what we’ve collectively learned and prepare ourselves for future volatility as, just with the tides, these waves often come in sets.
Pricing Enters the Board Agenda
The resurgence of inflation thrust pricing onto the agendas of all board meetings. Organizations that previously paid little attention to pricing dynamics found themselves in precarious positions as rapid-onset inflation soared. However, this period also served as a catalyst for change, embedding the importance of pricing into the corporate consciousness. Now, how companies monetize their goods and services is no longer a static given but a fundamental component of organizational strategy. It’s a topic that has etched its place on board agendas, reflecting its critical role in navigating market dynamics and influencing the bottom line.
Board Members’ Crash Course in Pricing
The past three years have been a period of intense learning for board members, with pricing at the core of many discussions. This crash course has highlighted the disparities in readiness and response among different organizations. While some were quick to adapt, employing new tools and leveraging informed teams to stay ahead of the inflation wave, others hesitated. They were hampered by a lack of preparedness and visibility, resulting in profit wipeouts that it will take the balance of the decade to recover from, if at all.
These recent stresses uncovered what it means to be commercially agile, and board members shared front-row seats to this unique theater. Today, boards benefit from reflecting on shared experiences to codify commercial agility and help their companies be better prepared to navigate future volatility, regardless of how well they handled the most recent passing wave.
Today’s Big Question: Drop, Hold or Raise Prices?
For pretty much everone today, from the President of the United States to junior field salespeople, this is today’s big question. Most boards recently advocated for upward price adjustments to combat inflation; this was sound. Tackling the derivative question is nuanced, but from our position, the correct answer is often the inverse of popular opinion.
The Argument to Drop Price
“Input costs indices are trending down, so prices must follow.” While that’s a simple message, it ignores three critical points.
- Businesses need to make more nominal dollars today (about 10 percent more since 2021) just to stand still. That’s the impact of inflation. It’s not that you’re pushing abnormal profits; it’s that the dollar has devalued, and it requires 10 percent more of them to sustain your business.
- Price decreases won’t stimulate demand if customers are simply spending less.
- This argument has nothing to do with value. In so many cases, we see that inflation drove up the value of what products do—think of a machine replacing labor; the machine inputs may be up 10 percent, but inflation also drove the price of labor up 30 percent. We’ll come back to this in a moment.
We acknowledge that this is a diverse audience and there are pockets where reducing price is the appropriate action. However, when looking at your business through the three lenses above, we often find the arguments for price decreases are hollow.
The Argument to Hold Price
Giving back the gains you worked so hard to achieve is incredibly risky to a business. It’s fair for customers to ask for concessions, and weshould always expect procurement to demand them, but when you look at the question through points one and two above, this answer often reveals itself. If your businesses are not generating higher real-dollar profits and your competitive set is maintaining relative market share (while individually experiencing revenue decline), the board can support holding the line. Back to our core arguments: 1) Prematurely dropping prices can decrease profitability to the point that the going concern is at risk. 2) If you’re the price leader in a stable market and you drop price, you just initiated a price war.
The Argument to Raise Price
Inflation not only drove up your costs, in many cases it drove up your value. To the prior example, the value of that machinery has risen 30 percent while inflation only lifted costs 10 percent. This price-to-value lens suggests there is significant headroom to continue advancing business strategies via price, be it through direct price increases, promoting cross-sell or driving other mutually beneficial behaviors. If your products differentiate via labor replacement or augmentation (high quality, less downtime, more efficiency), it might be time to take a close look at your value.
