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Calling the peak of inflation: Rocketing up, parachuting down

margin strategies

Current macroeconomic conditions represent a once-in-a-decade opportunity to win market share and maintain healthy margins. B2B companies need to capitalize with price leadership.

After three long years, the moment has arrived -standing supply chain problems, fueled by geopolitical conflict and a global pandemic - have finally started to peak. Across the B2B industry, and especially from those players at the top of supply chains, our clients are reporting supply chain and wholesale price drops. In stark contrast to the past three years, this represents an opportunity to capture volumes while also maintaining strong margins. B2B companies who can quickly pivot behind this market condition and show price leadership will realize a once-in-a-decade commercial opportunity.

Companies need to rapidly shift from defensive- to offensive margin-strategy

The period of economic volatility precipitated by the global pandemic has shaped a contemporary business leader who thinks lean, agile, and defensive. Margins have been under pressure for three years, COGS have been skyrocketing, and OPEX has been growing due to unprecedented inflation. The news that cost prices are falling should be welcome news in boardrooms around the world however, a macroeconomic factor that is positive for one company is also positive for their competitors. Consequently, the first-mover-advantage of price leadership in a market with decreasing costs is massive—rest assured that this is THE hot topic in every boardroom this quarter.

Except for commodities industries, in our experience with our B2B clients, there is often a time-lag of 1-3 months between a cost-price change and when it’s reflected in gross prices. High inflationary pressure in the second half of 2022 have forced companies to go defensive with margins and execute price-increase campaigns into 2023. When paired with falling cost-prices, this creates the conditions for what we do not want: a price whiplash. As gross prices are still rising to meet targets, the costs rapidly dropping from the bottom of the price pyramid naturally encourages commercial leaders to decrease gross prices equally as rapid sending confusing pricing signals to the market and decreasing customer confidence. What is needed is a conscious, graduated approach to managing the inflationary peak.

Price drops are not uniform; nuance will set-apart “good” from “great”

Prices are not falling uniformly across product categories or geographies. Initial insights from our clients are indicating steep price drops into Q2’23 from East Asian suppliers, largely transportation cost driven but still growing, albeit slowing down, cost prices from European suppliers. Consequently, the commercial action to take cannot be broad-spectrum price freezes or decreases, but rather product-assortment-targeted.

To capture the full value of the impeding cost-price decrease, commercial activation needs to be considered. What are your destination categories? Where do you need to be a price-fighter? Does that line up with the cost-decrease expectation? If so, this could be an unparalleled opportunity to gain market share on your peers.

In one of our clients, we are seeing them actively lining up a multi-disciplinary team including Procurement, Assortment, Pricing, and Marketing stakeholders to capture this opportunity strategically along their assortment, pairing it with a marketing campaign around, “sharing the deflation”. We have high confidence in the success of this campaign.

Do not trade “good volumes” for “bad volumes”

In this exciting market condition, we leave one note of caution: do not trade “good volumes” for “bad volumes”. While the urge to directly decrease gross prices upon news of a cost-price decrease is strong, we encourage discipline—your business is not what it was pre-pandemic; in most cases OPEX levels are higher, requiring a high margin base to cover. Moderation is the word of the day, budget margin targets should still be adhered to, but instead of only considering gross price increases to achieve then, start building in cost-price decreases into the calculations, reducing and eventually reversing the need to raise prices further.

That being said, due to pricing capability constraints, if the choice was between generally lowering prices to drive-up volumes or maintaining high prices, but with healthy margins, in most cases we would recommend meeting gross profit targets with lower volumes; reducing fulfilment requirements. A cost-price decrease is not an immediate signal to lower gross prices—actions have to be conscious, measured, and ultimately fit-for-purpose with the overall commercial strategy.

Three margin strategies available

Commercial leaders could embrace three different margin strategies in current market conditions. First, they can choose to go quick and reduce prices rapidly ahead of the market, which could help them gain market share. Second, they can opt for a margin optimal strategy where they rocket prices up and then parachute them down to optimize margins. The third option is to maintain their current price level and manage for current positioning. While these options always have existed to commercial leaders, the impact that this may have on their business in the next two quarters represent a unique opportunity to rapidly grow the health of the business.

How Simon-Kucher can help

For over 35 years, Pricing has been at the core of what we do. For the past three years we have helped countless companies around the global defend their margins by growing and exercising their pricing lever. As global supply chains calm and cost-prices peak, we look forward to working with our clients again and helping them navigate this once-in-a-decade commercial opportunity. Price leadership in this next half year will be a critical success factor in supercharging B2B businesses as inflation and cost-prices finally normalize. Call the peak—we’re ready to support you in “going offensive” with your margin strategy.

To learn more about our research or how you can better prepare your organization for upcoming cost-price decreases, please don’t hesitate to reach out - we’re here to help.

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