The economy’s in a bubble! A crash! A recovery? Careful, you might get whiplash. Looking back at the roller coaster ride, a lot of companies lost a lot of money because they could not act, or even react, quickly enough. Strangely, this money rarely showed up as a line item on the corporate P&L, although the losses had a huge impact on share prices. What were these losses, and how can we apply the lessons more profitably now?
Most companies have a hard enough time figuring out “optimal” pricing in relatively static markets. List prices get revised once or twice a year, often through a process that involves more heat that light. Promotional programs and discount plans get a fancy spreadsheet model that never gets revisited to measure effectiveness.
When conditions change rapidly, companies often get caught on their heels. For example, when energy prices rose rapidly, companies like UPS who recognized the importance of energy prices to their bottom line, and their competitors’ room to maneuver, implemented fuel surcharges and turned energy costs to their advantage. Most companies do not monitor fuel prices carefully, however, and most of them failed to take advantge of price increase opportunities or even to keep up with inflationary pressures in their supply chains.
By the time many of them had figured out they should have raised prices 6-12 months earlier, the economy had tanked and pricing power evaporated. Even then, some companies had waited long enough to react that they could still push through price increases of 5, 10, and even 12%.
Now companies have retrenched for the recession and are timid about raising prices. How will you know when? And how much? Or if you can raise prices in some industries but you have to be more flexible with discounts in others?
You need, in a word, agility. You need to see what’s happening now, not just what happened last quarter. And you need to be able to adjust how you price and discount based on that. You can’t wait for your year-end pricing review. You can’t wait for a marketing review. You need to tie into your sales team and empower them to be agile. If you don’t, your company will likely leave 10% or more of its profit on the table. You may not have to declare it as an expense, but your investors will notice the difference.