2022 will be the year when history changed. Inflation surged to levels not seen since 1951, and a war with widespread consequences broke out in Europe. We are moving towards an economic winter and the situation is getting worse.What should companies do to handle the new challenges and protect their margins?
Konjunkturinstitutet (KI) published new figures on December 21, 2022, that indicated that Sweden will enter a recession in 2023 that will last until 2025. Due to the high inflation and rising interest rates, Swedish households are under pressure and will cut back on consumption in the coming months. KI expects the labor market to be gradually affected when unemployment levels rise due to the dampening of demand.
Companies face two challenges related to profitability – lower demand for their products and services, and surging costs. Given the relatively stable history, are companies prepared for handling these new challenges?
The short answer is No. Typically, due to the historical stability of costs and demand, companies have a very static pricing process that makes it hard to quickly adapt the prices when the situation changes. Furthermore, there is a tendency to sell all-inclusive offers that include value-adds without getting paid for their true value. This means that price-sensitive customers will not buy and customers that do buy, typically pay less than the value delivered.
Simply raising prices across the board once a year to protect margins will not work as it delays the impact, and could result in lower sales volumes, and a loss in total contribution.
So, given the new market situation and the way most companies approach pricing, what can be done to protect margins and stay profitable?
The first action is to create a more dynamic pricing process that reduces the administrative burden of price updates. This typically involves pricing tools or systems that can be configured to each company’s specific pricing needs and set value-based prices. Given a new process and tools, the company becomes agile and can quickly respond to cost increases and other market changes.
The second action is to differentiate the offering to better meet different customers’ varying needs. Do not assume that all customers want all parts of the offering. Instead, modularize it based on the customers’ different preferences and values, and create packages or customer-unique offerings. Price the offerings based on the customers’ willingness to pay. Presenting the customer with several thought-through alternatives creates a choice situation where the customers bargain with themselves and possibly buy up to more expensive alternatives. Or buy a new lower-priced alternative that contains less at a lower cost to the company such that margins are protected or even increased.
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