As 2023 quickly approaches, many B2B companies are still experiencing the effects from the supply chain crisis that has defined much of 2022. Impacted by labor shortages, production gaps, and logistical bottlenecks, purchasing departments have had to significantly change their order behavior to overcome extraordinary supply chain disruptions.
Purchasing departments are outsmarting sellers
Many B2B companies reacted too slowly to the crisis, as their customers’ purchasing departments looked to secure supply. Two clients approached us facing challenges from changing buying behavior over the past few months:
- An Australian engineering firm found its monthly order book had increased fourfold compared to six months prior
- A major international ingredients company had committed its entire volume for the year ahead to orders placed in the first month of the year
As their customers attempted to de-risk their own supply chains, they were forced to bear the burden of future cost increases, became responsible for managing the risk in the supply chain, and were unable to serve incremental demand throughout the year.
While some companies have been able to pass on extraordinary price increases to their customers, many left significant money on the table. As purchasing departments continue to become savvier, sellers ‘need to establish better pricing principles to stay competitive and profitable.
How can B2B companies thrive given unpredictable supply chains?
To manage the dynamics of a changing market, B2B companies need to define a flexible pricing strategy, where suppliers share the risks of uncertain costs from long lead times with their customers. The following four initiatives can help companies optimize their pricing for lead times and better navigate the current market situation.
The following 4 pricing principles are key to success:
- Improved forecasting of market demand
Price forecasting uses relevant factors that define the demand for products at a given point in the future, based on potential prices offered. These factors may include supply drivers (e.g., input costs, production throughout), competitive dynamics (e.g., competitor supply, commercial activity), and demand characteristics (e.g., seasonality, industry activity). By identifying the right factors and modeling demand scenarios based on them, companies can better predict where demand is heading.
- Optimized pricing to reflect current market dynamics
Dynamic pricing has been used extensively in the travel sector for decades, and it’s now gaining momentum in industrial businesses. A dynamic pricing model generates customer-specific product prices based on the current market and supply and demand environment. The granularity and flexibility of this pricing approach allows companies to reflect differences in customers’ willingness to pay and buying behaviors and set more appropriate prices.
For more information on forecasting and dynamic pricing, please refer to Managing Partner Kiran Pudi’s article, Introduction to B2B Dynamic Pricing.
- More flexible contracts
Cost increase demands from suppliers has increased significantly over the past 12 months. For example, one of our clients, which previously saw roughly one increase per year, now receives monthly or even weekly requests.
B2B companies should sophisticate their contracting models to more evenly balance the financial risk between parties, improve the predictability of supply to customers, while ensuring that services that add value to customers are monetized for (e.g. shortened lead times).
Innovative contracts should include a combination of agreed performance commitments, triggers for pricing or supply change, and price lists for value added services.
- Faster responsiveness to change
Being able to react to changes quickly and flexibly is key to staying on top of the dynamic and disrupted supply chain. Companies need to proactively monitor supply and demand and the factors affecting them to respond in a timely manner. Our experience has shown that delays in adjusting pricing, tailoring the product offering, or shifting sales focus can result in overwhelmed order books, an overcommitment on price, and in the long run a squeeze on profitability.
Better times ahead?
There is no single one-size-fits-all solution to tackling the pricing implications of the current global supply chain crisis. However, by applying the abovementioned pricing principles, B2B companies can deliver better results in the near term and be better prepared for future supply chain challenges.