5 Ways to Manage Inflation for CEOs and CFOs
Inflation concerns are skyrocketing, and the prospect of a recession sooner rather than later looms large on the horizon for many businesses and the CEOs and CFOs. Labor shortages abound, COVID-19 turned out to be more of a marathon than a sprint and right off the back of that, regional conflicts and global unrest are causing unprecedented price rises. How are CFOs and CEOs planning to address the situation and look to not only survive, but recognize and seize the opportunities for prosperity and growth? In that light, we examine 5 ways that those of you in the C-Level positions of your respective organizations can use to potentially manage inflation and strategize in dealing with pricing pressures.
At Pricefx, for more than 10 years, we have been assisting large-scale enterprise business organizations just like yours to realize their unique pricing niches with the use of innovative pricing software technology through good economic times and bad.
As such, Pricefx is perfectly placed to discuss all manner of our customers’ inflationary squeezes and managing those pricing pressure points through tough times of sudden and extreme change. So, let’s dive into a quick rundown of 5 ways to manage inflation before we delve a little deeper into each.
5 Methods to Manage Inflation for CEOs and CFOs
Due to the practice many companies and their managerial and executive-level teams have experienced in dealing with COVID-19 and the challenges that threw up, confidence levels in managing through the next inflation and recessionary crisis are high but can vary across businesses themselves. The C-suite functional leadership teams—generally have belief that their companies are better prepared to handle all realms of ‘doom-and-gloom’ disruptions and global downturns. CEOs are perhaps less bullish.
The past two years or so have exemplified that business organizations can learn to deal with a global crisis. The key to preparing for the next one lies in proactively thinking about the inflation at hand and confronting it head on. And while the list below is a non-exhaustive one, consider these 5 methods to manage inflation and prevent profit margin erosion in your business;
- Focus on People and Your Product. Your Profit Will Follow Naturally.
- Buy Raw Materials, Goods and Services at Today’s Prices
- When Cutting Costs – Don’t Cut Motivation – Innovation is Key
- Stay Agile, Keep Pivoting & Get Transparent & Intelligent with Data
- Driving Value to Transform the Customer & Product Experiences
1. Focus on People and Your Product. Your Profit Will Follow Naturally.
While many businesses say they put people before profits, in reality, it is a statement that confronts the conventional business paradigm that you need to focus on the bottom line above all else. However, nothing about the current inflationary pressures are conventional, so thinking differently is required.
When it comes to your people, having the right people that are in the right job suitable to their talents and strengths, and are motivated to produce their absolute best for your business and themselves is critical. In other words, it means that you have specifically and deliberately aligned your staff’s skills, personalities, and strengths with what you require of their job role.
If you focus on your people and create a working environment where they feel nurtured, cared for, content and inspired, they will be motivated to serve their customers in a powerful way.
In turn, this makes for loyal clients who feel good about themselves and enjoy working with your business on a regular basis, spending money on your products and services.
Through word of mouth and social media, loyal customers generally encourage others to do the same which, in turn, generates the necessary income over a sustained period to allow the business to create profit and grow.
Driving talent and recruitment to battle the current global labor shortages will be crucial.
If you have the right people in the role that suits them best, working with the right tools and technology in a strategic and targeted fashion, then you will have the absolute best chance to optimize your product (goods or services) for quality and its performance. You need to spend time on the product. Even if you have the right people, you will be required to ensure your product is set up correctly, in terms of go-to-market in addition to quality, rollout and the roadmap. Setting up the overarching strategy should not be rushed and getting it ‘just right’ may take some time.
With people and product aligned, you have laid the best possible foundation possible for your profit to fall out of that calibration in a natural way. If you have been transparent about business challenges and goals, the people help you to sort out the profit. it doesn’t mean that you forget about it. You still need to establish benchmarks and targets, and your people help you achieve it. The motivation to achieve comes from the bottom up rather than you having to walk around the business shouting “profit profit profit”.
What’s more, addressing workers’ desire for greater flexibility across virtually every aspect of the new working environment underpins these strategies and will help facilitate profit.
Talented people can now reasonably expect opportunities to work when and where they like—and may be prepared to seek employment elsewhere if those choices are denied to them.
2. Buy Raw Materials, Goods and Services at Today’s Prices
With inflation eroding purchasing power and rising production costs eating into profit margins, regardless of their industry sector, CEOs and CFOs should consider advising their procurement teams into buying raw materials required for production, or goods and services that are on sold at today’s prices, not what they are going back to be in the future. Yes, it can be a gamble as runaway inflation must finally end at some point, but history tells us that overall, prices rarely go backwards.
Business leaders need to weigh up their anticipated price increases against the cost of financing and carrying extra inventory. Such a strategy flies in the face of what many companies have done historically in the past – trimming inventories to free up cash flow.
High production costs can threaten the viability of entire business organizations that can become squeezed by rising costs of production. And while in some cases in different jurisdictions, governments have shown some taste for intervention and regulatory relief in raw material price rises in some sectors deemed critical, it cannot be depended upon.
If it is possible to purchase the ingredients of what your company needs to make your products at a decent and fair price today, consider doing so.
3. When Cutting Costs – Don’t Cut Motivation – Innovation is Key
Once upon a time, John F. Kennedy observed that the word “crisis” in Chinese is composed of two characters and is attributed with saying;
“The Chinese use two brush strokes to write the word ‘crisis.’ One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger–but recognize the opportunity”.
And while linguistically, he has since been proven slightly wide of the mark, JFK’s sentiment of crisis creating opportunity certainly holds true. A crisis can be the best time for innovation in your organization.
When speaking of innovation, it’s natural to assume that breakthrough innovation requires breakthrough technology. While technology certainly can help, it’s not the ‘be-all-and-end-all’. Innovation comes in all shapes and sizes.
In times of crisis, many large organizations tend to put innovation to one side and forget about it. They become so focused on shareholder return that they view innovative ventures as too dangerous or too much of a risk. Their drive for certainty overwhelms everything else. It’s a common mistake and many businesses lose out on the benefits of innovation in the end.
Whether you’re creating a new product, service, process, or business model, innovation is all about keeping an eye on costs while moving forward to create novel new solutions.
COVID-19 drove a decade’s worth of digital transformation and innovation, and continuing that adaptation is not expected to slow down anytime soon for successful companies.
Adopting digital technologies and methods of working are seen as active customer growth strategies and cost-efficiency measures, and increasingly as a source of productivity gains at a time of acute talent shortages and rising wage costs.
Investment in technology like pricing software is only a small piece of the digital transformation jigsaw.
Paying attention to change management, process reengineering, and workforce upskilling will also enable competitive and sustainable businesses advantages.
4. Stay Agile, Keep Pivoting & Get Transparent & Intelligent with Data
In times of rampant inflation, using data-informed pricing software to identify the different segments of your business where cost changes are felt the most can be crucial. It’s a natural extension of Benjamin Franklin’s adage, ‘look after the pennies and the dollars look after themselves’.
For example, if your line of products is difficult to source, limited in supply or has few viable alternatives, passing on a small cost increase to your customers in order protect your profit margin can be easier to manage for this segment.
What that means is that if the cost of one of your components in the manufacturing process is only a small percentage of a larger, finished product, passing on a small and reasonably explained price increase is usually well understood by your customers.
Remember, even small price increase increments can add larger amounts to your company’s bottom line.
However, just as importantly for the future, the visibility of pricing technology enables you to explain cost increases thoroughly yet concisely to your customer and maintain that critical good business relationship.
It is important to leverage your data to provide customer and product segmentation to power your pricing software. Data can help your salespeople determine who your customers are, how and what they buy, and how to best optimize your prices for them.
In good economic times, companies have a certain pace at which they review prices. However, when uncontrollable inflationary forces take hold, your business may need to react quicker than it otherwise would.
Consequently, most companies need to have nimble pricing maneuverability to refine their pricing strategy, having both transparency and genuine real-time insights into their own data, to generate new prices more frequently.
Using the technology to pivot and update prices on the fly will give your business the most opportunity possible to yield profit in uncertain times and prevent leaking margin.
5. Driving Value to Transform the Customer & Product Experiences
Proactive pricing is the most powerful lever to pull to mitigate the downward pressure on margins that a recession can create. However, even the most optimized and nimble price changes can agitate your customers without the right communication strategy. Putting pricing software technology and communication together can build your organization’s trust and reputation by being open about your price increases and drive your company’s value.
The Customer Value Experience
In an era of hyper-connected B2B and B2C customers, where the customer experience is arguably important as the product or service itself, modifying the business model and using value to transform the customer experience is key. Real-time insights on changing consumer behaviors and attitudes have become important differentiators. Going forward, when economic times get tough, go-to-market strategies that emphasize customer experience will be crucial to success.
The Product & Price Value Experience
Prices rising in a recession is not a secret. Your customers will naturally expect to pay more when the economy is under inflationary pressure. They will welcome the transparency that your pricing software provides into how and why your prices are increasing. But communicating the increases is important too – in addition to your price increases, keep your clients in the loop of inventory status and expected availability dates for out-of-stock items to maintain trust and a quality relationship.
Subsequently, direct and open communication with your clients driven by transparent data is more critical than ever. Work together with your clients to plan product availability, forecast wait times and announce them and when necessary, collaborate on establishing alternative strategies.
Transparent, defensible and communicated pricing will empower your sales teams to be more proactive and decisive with your customers.
Getting out in front of upcoming cost hikes is a precious commodity in establishing the value perception with your clients.
Additionally, concentrate on your product’s value when economic times get tough (remembering that pricing is based on the perceived value) to your customers, not raw material and fuel costs alone.
For example, if your customers see value in your add-ons such as same-day delivery, communicating to your clients because of increasing fuel costs and driver shortages that you need to increase your prices is usually understood. But if you fail to communicate the increase, that’s the type of slip-up that can turn your valued relationship with your clients into an ugly one.
Inflation & Driving Value with Pricing Software
Now you know the 5 methods of managing inflation keeping both you as the guardian of your company’s bottom line, and your customers as happy and successful as possible.
If you are looking to drive value and profit during an inflationary cycle and not simply ride out the storm, then you will want to consider comprehensive pricing software solution like Pricefx. With the latest in pricing technology, you can react at speed and respond in real time, while using it as a force of transparency and visibility for your clients, important factors to maintaining good business relationships.
If your business is already fully aware that exploring pricing software options that will fit your company’s needs to assist during a downturn, this article below can help you finalize your pricing software choice;
On the other hand, if you would like to learn more business success tips in a tough economic climate, see Tim Shorter’s (Chief Sales Officer at Pricefx) recent article;
About the Author
Gillian Sheeran is Chief Financial Officer (CFO) at Pricefx. Prior to Pricefx, Gill cultivated a wealth of experience as an International CFO with extensive working knowledge of Fintech, software and IT consulting services firms, including business transformations and returning a loss-making business to profit in only 9 short months. On the weekends, you will find Gill playing tennis, taking long walks, reading fiction or watching Netflix and Disney with her family.