How to Manage Fluctuating Prices & Margin Erosion
In the current business environment, regardless of the industry your company operates in, if you have not changed your prices at least once (or even more this quarter), the chances are you’re missing out on plenty of profit that is being left at the checkout. Focusing on changing price levels of raw materials and fuel, anyone from technology retailers and wholesalers to companies in more specialized fields such as waste management and food distribution are being required to maximize their profits by making tweaks to their prices every time it’s necessary to do so. And right now (depending on your industry and the scale that you wish to operate), that could be as often as every day, or even every hour. Do you fancy taking on a price list update across tens of thousands of your products in an Excel or Tableau spreadsheet? No, we would not fancy it either.
At Pricefx over the last 11 years or so, we have helped hundreds of clients scale up and grow their businesses and become larger and more profitable in good times and bad. However, it’s not all about the power of the software, you need to play your part too.
In this blog article, we examine what you will need to do to grow your business in a period of runway fluctuating prices, how pricing software can help and why you may not require our assistance at all.
Let’s start off by digging into what price fluctuation is and what causes it before we look at how pricing software can ease the pricing pain and help your organization thrive in uncertain times.
What is Price Fluctuation & How is it Caused?
Price fluctuation is by definition, considered to be a bad thing. To all intents and purposes, it is merely a price change. However, the world ‘fluctuation’ sends tremors through the ranks of pricing professionals as the use of the word signals that the price change is volatile or out of control. Otherwise, it would just be called a ‘price setting,’ right?
There are two factors that can cause rampant and out of control price fluctuation, driving the pricing of goods up and down suddenly:
- Market Forces – Your prices can be affected by market demand competition. For example, an oversupply of your product in the market, or too many competitors in your industry can drive prices down. On the other hand, a shortage of your product can drive prices suddenly up. Similarly, should some of your competitors leave the business or go bankrupt prices for your products may increase quickly.
- Costs of Production – Production costs refer to the costs your company incurs from manufacturing a product or providing a service that generates revenue for your business such as labor, raw materials, consumable manufacturing supplies, distribution, transport, and general overhead.
Understanding Price Fluctuation – The Real-World Example of Natural Gas
Looking at natural gas prices (or any basic energy price for that matter) are splendid examples to understand price fluctuations. Energy prices like natural gas can fluctuate wildly as consumers are limited in their ability to substitute other fuels when the price fluctuates. Residential customers cannot replace their heating system quickly every time a price fluctuates up.
While you can choose to buy apples cheaply if the price of oranges skyrocket to ease the damage to your food bill at the local supermarket, most people do not have that level of flexibility in heating their homes.
Anyone closely watching current events has undoubtedly noticed that natural gas prices (particularly in Europe), are fluctuating wildly. Let’s take a closer look at a range of factors that can cause price fluctuations in natural gas prices by way of just a single industry example;
- Weather Changes: Weather can affect short-term gas demand. Unexpected cold snaps can cause fluctuations in the amount of natural gas that is demanded by end users and prices may increase.
- Production/Imports: The amount of natural gas produced and imported can have significant impacts on prices.
- Delivery Constraints: Constraints can occur at any point along the pipeline delivery system, which may change gas supply and distribution, resulting in price fluctuations in the relative amount of available natural gas. Examples may include any form of supply difficulties such as war and conflicts, sanctions and embargoes, production valves freezing, equipment breaking down, the implementation of new transmission routes etc.
- Gas Storage Levels: Gas storage is needed during times of high demand to manage prices. As a result, market participants may compare current storage levels with current or future demand when evaluating prices.
- Market Information: A lack of timely and reliable information regarding previous periods of price fluctuation can cause radical price shifts as market participants may base their trading decisions on speculation and rumors.
Why is Price Fluctuation So Feared?
Uncertainty is the enemy of any business owner, or even a customer for that matter.
If you go to the grocery store to quickly buy a dozen eggs and a gallon of milk, you have an idea what it will cost you and you sometimes grab some small change off the kitchen counter along with the car keys to go the store, right? You have some idea of certainty as to what the price will be for the eggs and milk. Because you know the price, you might leave your phone and your wallet at home.
You simply do not expect to be surprised by the price at the grocery store checkout. As a consumer, you have a perception of price predictability so you can budget, and not have to drive back home and pick up your wallet full of credit cards. That sort of price unpredictability can make the calmest customer agitated and nervous.
Similarly, businesses that may have hundreds of thousands if not millions of dollars on the line in price differences in a single contract or transaction can become understandably nervous about price unpredictability.
Most business decisions are made based on expected outcomes. For example, firms make pricing decisions based on the expected demand for what they sell.
To make these decisions, companies need to form a view about what the future might look like. However, that becomes a far more arduous task when prices are volatile and fluctuating wildly.
The ‘new normal’ of the pandemic and early post-pandemic world have been characterized by extreme price volatility and fluctuation.
Businesses can suffer during these times by ’paralysis through analysis’. There is always uncertainty about the future – but large increases in uncertainty of the kind that we have been experiencing recently make it difficult to make these forward-looking pricing decisions.
Firms may wait to extend their operations, make an investment, or even defer hiring until the future path of the economy is clearer. On the flip side, depending on your specific industry, there may be ways to not only cope with price fluctuation but to enable your organization to thrive.
How to Thrive in Periods of Price Fluctuation
If you’re lucky, you’re in an industry like the airline industry that has found a method to mitigate price fluctuation by controlling their fuel costs. For the rest of you, you may have other production costs that you can control and tie to long-term contracts, or you may require the assistance of pricing software to help make your business scalable and successful as prices fluctuate. First up, let’s look at how the Airline Industry manages price fluctuation.
Managing Airline Fuel Price Fluctuation
The largest operating cost for airlines is typically fuel expenses. Fuel costs are such a huge part of an airline’s overhead that fluctuating oil prices can have a significant impact on an airline’s bottom line.
To protect themselves against sudden and unexpected fuel price fluctuations, and sometimes to even take advantage of the situation, airlines commonly hedge their fuel costs. In this hedging scenario, an airline may believe that prices will rise in the future. To mitigate this, the airlines may sometimes purchase substantial amounts of current oil contracts for its future needs at today’s prices and lock into a long-term contract, thus protecting them from rising prices.
You may have prices that you can lock up in future contracts, for you to mitigate future anticipated raw material price rises, so that you can not only continue to be viable in uncertain times, but even grow your business.
But what should you do if you’re not that lucky in your business model?
Can Pricing Software Single-Handedly Manage Price Fluctuation?
If you’re thinking that pricing software is the magic bullet to help your business thrive and grow in times of seemingly uncontrollable price fluctuation, you might need to think again. But on the other hand, it sure can help.
It all depends on the unique aims and objectives that your business has.
For example, if you run a small family run sporting goods store at one individual location and you don’t sell online and you’re happy to turnover $20k per month, you probably have no need for pricing software at all.
On the other hand, if you’re an aspirational business owner and you are looking to grow your one single sporting goods store into a nationwide, multi-state or even multinational business with a vast catalogue of thousands of products that are available in your chain of bricks-and-mortar locations in addition to your online store – well, hands down – you need pricing software – and – you need it yesterday.
The more products you have that are fluctuating in price, the closer you need to watch and react to price changes across the board. Pricing software makes that scalable and doable due to automation and little requirement for manual input.
As we discussed at the beginning of this article, can you imagine trying to manually update your price list 10 times per hour, per product, per day?
How Pricing Software & Good Strategy Work Hand-in-Hand to Mitigate Price Fluctuation
As great as pricing software is, it cannot manage price fluctuation and help you grow your business all alone. You need a good pricing strategy that suits whatever your organization is aiming to achieve, and the pricing software can help you execute it.
Pricing Software cannot singlehandedly understand your business strategy, whether it is cost-plus, value-based or high-low pricing strategy. However, it will help you execute your business strategy, and as you grow, it will assist in tracking, setting, and changing all those thousands of prices that are fluctuating, and in the process, protect your profit margins.
In other words, in these times in business when nothing is certain except uncertainty itself, there could be any number of disruptions to your business. From natural disasters, to Covid, war and other regional conflicts, it is smart business to be able to protect yourself in some way so that you protect potential profit that may help your organization grow and avoid margin erosion.
It pays to be proactive, so you’re never in a position where you’re having to report losses because you weren’t ready to act.
We hear from distinct types of organizations everyday feeling the same ‘price fluctuation growing pains’ and assist them in pricing precisely the way on the products they need to execute their unique business strategy.
If you would like to continue your pricing software learning journey, check out the article on the link below to help you select the best pricing software for you: