Six Tips for Pricing During Stagflation

Last Updated Sep 16, 2008 12:46 PM EDT

  • Six Tips for Pricing During StagflationThe Find: While the dismal news from the markets today indicates the economy is likely to be heading down for a while longer, input prices continue to go up, complicating pricing decisions for many companies, but there's expert help available for firms struggling to price their products while stuck between an economic rock and a hard place.
  • The Source: "Pricing in a downturn" from The McKinsey Quarterly (free registration required).
The Takeaway: If there's any silver lining to tough economic times, it's usually the declining cost of inputs, but with the recent downturn businesses have had to face a double whammy: jittery customers gripping their wallets ever more tightly at the same time that the cost of fuel and other expenses continues to climb. So what's to do? The experts at McKinsey have six suggestions:
  • Be vigilant in monitoring pricing policies that reduce revenue--such as volume discounts, rebates, and cash discounts--as well as cost-to-serve, including freight and sales support. In the current downturn, rising costs and declining demand can cause these elements to change more dramatically and quickly than they have in the past.
  • Use transaction-level data to measure precisely the profitability of each customer to detect if the cost to serve particular customers or declining order volumes are nudging those customers below target profitability levels.
  • Adjust to changing customer needs. Downturns always prompt changes in customer needs .... The dynamics of the current downturn mean that such swings can occur even more rapidly. In this environment, the best companies are constantly assessing--through market research and direct contact--how economics are changing for their customers.
  • Update price sensitivity research. Dramatic increases in energy and food prices have made consumers much more sensitive to prices across a wide range of product categories.... Market price tests become obsolete after just a few months.
  • Monitor your industry's microeconomics. Radical shifts in costs and demand have thrown previously predictable market pricing mechanisms into chaos. Responding correctly requires a keen understanding of the microeconomic forces at play at the industry level.
  • Study your suppliers.... this downturn demands that companies reexamine not only the microeconomics of their own industries but also the microeconomics of their suppliers' industries.
If you're interested in a more in-depth discussion with examples of each point, check out the complete article.

The Question: What impact has the downturn had on your company's pricing?

( Image of prices at the supermarket by Yahoo! SEA, CC 2.0)

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    Jessica lives in London where she works as a freelance writer with interests in green business and tech, management, and marketing.