How to Profit in a Recession: 5 Ways Pricing Software Can Help
We’ve all seen the headlines. Record inflation and fuel prices, an energy crisis driving distribution and delivery costs through the roof and the specter of a looming economic recession hanging over the heads of many businesses. Sure, let’s talk straight out about it – coming out of COVID-19 and the follow-up impacts of the war in Ukraine – the volatility of market forces right now makes doing business a tricky prospect and only the resilient may come out the other side unscathed. However, rather than get swamped by the doom and gloom of the current economic climate, remaining proactive in your pricing can help you adjust and even maintain profitability. That’s why we have decided to take a deep dive into how to profit in a recession and examine 5 ways pricing software can help.
At Pricefx, as a provider of modern pricing software, we have spent more than a decade answering all manner of pressure points from our customers including assisting them in managing through tough times of sudden and extreme change, including for valued customers like Stanley Black & Decker.
So, let’s dive right on in by introducing the top 5 ways pricing software can assist with combatting rampant inflationary and recessionary pressures and grappling to keep the persistent price fluctuations under control, before we take a deeper examination into how the 5 methods help way you remain profitable in your business in rough times.
The Top 5 Ways Pricing Software Can Help Your Business Remain Profitable in a Recession
The real question for company CEOs and enterprise-level entrepreneurs is: how exactly do you adapt, remain resilient, and come out ahead? There are no rights and wrongs and what applies to one type of organization may not necessarily apply to another business. However, as companies attempt to navigate uncertainty in business today, when we pause and really think about it, we can boil it down to 5 ways pricing software can assist in maintaining profitability;
- Adapting Quickly & Remaining Pricing Nimble to Mitigate Risk
- Being Price Proactive, Communicating & Focusing on Value
- Strategic Price Adjustments by Customer or Product Segments
- Protecting Margin Leakage
- Plug Your Rebates, Discounts and Promotions Gaps
1. Adapting Quickly & Remaining Pricing Nimble to Mitigate Risk
In a usual stable economic climate environment, companies have a certain pace at which they review prices. However, recessions and the inflationary forces that accompany them force business organizations to act with more speed than they usually would. Consequently, companies need to have the capability to promptly refine their pricing strategy, having both transparency and understanding of their macroeconomic environment as well as insight into their own data, to generate new prices more frequently.
Becoming faster with your price list updates will be critical to maintaining profitability and pricing software can help you do it.
Your pricing team must be able to monitor what approved price levels and notify customers of price changes on time to avoid margin leakage.
In recessionary times of high inflation, this can mean tracking results at a customer-item level on a weekly or even daily basis to gain an understanding of where to increase your business focus.
It is precisely a problem that European tire manufacturer, Michelin, came to Pricefx to solve.
Using the Pricefx Price Setting module, Michelin cut their price list update time from 2 months to 20 minutes!
The price-setting and price optimization software tools work together allowing Michelin to make the most of their pricing strategy. All while eliminating the opportunity of 2 months of potential margin leakage and maintaining bottom-line profit opportunities even in the current economic conditions.
2. Being Price Proactive, Communicating & Focusing on Value
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 that kind of transparency is enhanced by pricing software.
Prices rising in a recession is not a secret. Your customers expect to pay higher prices 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.
Keep them in the loop of inventory status and expected availability dates for out-of-stock items too to maintain trust.
As many B2B companies conduct business via long-term contracts, many of which are governed by volume commitments. But contracts signed 12 months ago do not account for the skyrocketing costs that a recession can bring on. Ideally, you can use your CPQ (Configure Price Quote) software to have automated written clauses into each contract that allow for cost-driven increases or shortage of inventory.
Subsequently, direct and open communication with your suppliers driven by data is more critical than ever. Work together to plan product availability, forecast wait times and establish alternative strategies where necessary. Transparent and communicated pricing will empower your teams to be more proactive and decisive with your customers. Getting out in front of upcoming cost hikes can be invaluable to the effectiveness of your pricing models.
Additionally, concentrating on your product’s value in a recession (recalling that pricing is based on the perceived value) to your customers, not raw material and fuel costs alone.
For example, if your provided express delivery has value to your customers to maintain their good business relationships with their own clients, communicate to them that it is because of increasing fuel costs and driver shortages that you be required to increase your prices.
3. Strategic Price Adjustments by Product or Customer Segments
In recessionary times and the related environment of almost daily price fluctuations, using pricing software to identify the different segments of your business where cost changes are felt the most is critical.
For example, if your line of products is difficult to source, limited in supply or has few viable alternatives, passing on a cost increase to your customers in order protect your profit margin can be easier to manage for this segment.
For instance, 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 a bundle to your bottom line.
Learrn More Here About How a Small Percentage Can Make a Pricing Difference
On the customer side of the segmentation fence, if you have a selection of highly competitive clients that compete in markets or products where purchase price is a critical buying factor (or even concentrated customer segments across different regions where cost impacts are irregular), you may need to allocate cost increases carefully to protect your margins. It is important to leverage segmentation to determine who they are, how they buy, and how to best optimize your prices for them.
So, that means staying on top of your data.
Having accurate and real-time internal data (including current and projected sales history and costs) as well as external data (like customer demand, competitor prices, and channel partner data) provides a holistic market view.
Fully integrated pricing software tools bring all the essential data sets together for specialized analysis that supports optimal pricing decisions and helps you understand exactly how much revenue is gained from each transaction and where money leaks.
The right data will decrease risk by revealing profit and margin opportunities in addition to helping you find ways of mitigating costs.
4. Protecting Margin Leakage
Speaking of margins, protect them.
In addition to the above methods to avoid dollar-after-dollar of profit slipping away between the cracks, use your pricing software to identify as many possible margin leaks as you can.
For example, a common oversight is not recovering all the costs involved in service, delivery, or other processes. Define and track them.
Set minimum order quantities and establish as a rule in your CPQ software tool so that your production and processing costs will not erode away all your profits.
And going full circle back to where we started this discussion on margin erosion, improve your invoicing efforts through automation as much as possible to shorten the time between your fulfilled orders and receipt of payment for your goods.
5. Plug Your Rebates, Discounts and Promotions Gaps
Recessions call for a critical audit of your discounts, rebates and promotions and ruthlessly dispensing with those that you can deem as unnecessary.
Reducing on-invoice discounts like promotional, volume, standard, and discretionary discounts, or off-invoice deals like buying group rebates and payment term costs can be a great place to start.
However, don’t ‘throw the baby out with the bath water’ and eliminate all your promotional programs.
Sometimes discounting is required.
One discount transformation to try in recessionary and inflationary periods is to transform discounts into rebate programs wherever possible to swap any risk onto customer performance targets for your customers instead of placing unwanted pressure on your margins.
Down the track (when the recession passes – and so far, at least – they always have), you can reintroduce discounting as rewards for customer loyalty and any danger of them eating into your margins has passed.
Getting Started with Pricing Software & Recession-Proofing Your Business
Now you know 5 ways that pricing software can help you maintain your company’s profitability in a recession.
If you are looking to succeed in business throughout a recession and not simply ride out the storm, then you will want a comprehensive pricing software solution like Pricefx that can assist you to react at speed and respond in real time. The options of losing margin, slow price list updates and throwing rebates and discount money out the door at a time when you most need to rein it in , does not bear thinking about.
If your company is done with throwing money away in recessionary times in the same way a drunken sailor spends it, then it sounds like time for your business to start exploring pricing software options.
If you already know that a total pricing solution will fit your company’s needs, this article below can help you finalize your pricing software choice;
However, if you have already exhausted your search for the best pricing software for you and have decided on Pricefx, talk to one of our pricing experts today to get you on your way;
About the Authors
Tim Shorter is the Chief Sales Officer at Pricefx. He has spent the last 22 years helping organizations drive digital transformation with an emphasis on pricing, business optimization, business intelligence and business process efficiency centered on improving bottom-line margin achievement. Tim, in his 10-year tenure within the pricing solutions industry, has focused his experience in partnering with customers to drive company-wide digital transformation and greater profitability.
Scott Green, VP of Price & Margin Excellence at Stanley Black & Decker Inc, creates and launches the strategies, processes and systems that resolve the company’s pricing challenges, delivering significant business value – faster and more effectively. Leading an organization through large-scale pricing transformation is his passion and talent, uncovering extra margin dollars and quickly increasing ROI by investing in pricing and ensuring that the avenues of communication between critical business functions are well-built and well-maintained.