Managing price to protect your margins

Rising inflation can pose a real threat to businesses – but savvy teams may see it as an opportunity. Inflexion recently hosted a session on this crucial topic for its portfolio.

A perfect storm is brewing for inflation. Brexit-related friction, supply chain disruptions from the pandemic, low interest rates and uncertainty around those and energy prices are all coming together to put upward pressure on costs. While many – including the Bank of England as well as the Fed – are suggesting the situation may be transitory, it may be wise to plan for the longer-term: if it turns out to be short-term, then at least businesses and customers are prepared to manage price and margins proactively. And equity may be eroded if the problems that come from rising costs aren’t dealt with.

Inflexion recently surveyed its portfolio with the results showing that inflation is considered the number one risk to businesses in 2022.

The timing may be serendipitous, since businesses are aware that costs are increasing and therefore budgeting accordingly, creating a real tailwind for value-driven pricing. Over 50% of those surveyed in the Inflexion portfolio are also feeling increased price pressure from competitors and customer dynamics. This makes managing price more important than it’s ever been before.

“You can only manage this effectively if you prepare properly, and doing so should help you get the impact you need and deserve.” With many businesses planning a price increase for this year, preparing and over-preparing will be critical for success. Most price reviews fail to reach their full targets because they’ve been insufficiently thought out.

Fortunately, there are frameworks in place for helping to drive the process in a smooth and effective way (see box). As part of its value acceleration toolkit, Inflexion provides advice on commercial strategy to its portfolio, and focuses on ensuring price and value is truly aligned to drive success. Much of the work is founded on setting ambitious but realistic goals, being data- and customer-driven and getting internal buy-in to overcome any fears.

Price value alignment in action

These areas of focus have helped a number of Inflexion portfolio companies to enhance their margins through reassessing their pricing: roof tile specialist Marley differentiated its pricing to better align with value and costs to see a significant EBITDA improvement, supply chain and risk management solutions specialist Alcumus optimised its pricing and packaging to better match customer needs to see a 70% increase in transaction value.

Specialist engineering business Aspen Pumps Group became a lot more agile and ambitious owing to the pandemic and the increases in cost, cost volatility and supply chain uncertainty. They have successfully pivoted to managing costs and prices more proactively to protect their margins and deliver a customer-centric service.

“Before Covid, our cost platform was very predictable and stable, and we could adjust prices annually in line with low inflationary changes.” explains Serge Becker, Managing Director at Aspen.  

But then came the pandemic. “It changed our costs dramatically because we had a far less stable supply chain. It meant we had to rethink our pricing strategy further and so we moved to look at it by product and region to better align with cost changes.”

The business also ensured it made any changes as customer-friendly and transparent as possible – looking not only at price levels, but also transportation charges, more fair rebates and discounts.

The impact of the price and cost exercise has been meaningful for Aspen. “We’ve spent a lot of time speaking to customers and explaining what changes are made and why. With the increased volatility in the market, we’ve also changed customer expectations, with them more accustomed to a dynamic environment. Finally, we now ensure sales teams really buy into all this.” Building internal transparency on costs has been critical to the success and confidence of the sales team.

And just as the pandemic forced Aspen to undertake its pricing review more than once, all companies should see aligning price, cost and value as an ongoing exercise rather than a ‘one and done’.