The pandemic wreaked havoc on the global economy, creating an inflationary business environment that adversely affected material, labor, and transportation costs. To preserve margins, organizations were forced to raise prices and pass those cost increases on to the consumer. Now, as supply chain and inflationary pressures retreat in the U.S., many consumer businesses are re-assessing their pricing strategies as they look to maintain higher prices and improve margins. 

“The prices of oil, transportation, food ingredients and other raw materials have fallen in recent months as the shocks stemming from the pandemic and the war in Ukraine have faded. Yet many big businesses have continued raising prices at a rapid clip,” the New York Times reports. “Some of the world’s biggest companies have said they do not plan to change course and will continue increasing prices or keep them at elevated levels for the foreseeable future.”

For many consumer businesses, these economic phenomena revealed just how underpriced their products were to begin with. Consumers may have squawked about higher prices, but absent real alternatives, they had to decide whether to pay the higher price or simply go without – laying bare their products’ true price elasticity. Armed with this knowledge, many companies have yet to lower prices to consumers in spite of receding inflationary pressure – resulting in higher profit margins, at least for now.

In fact, consumer prices continue to rise. According to the Bureau of Labor Statistics, the Consumer Price Index (CPI) increased by 3.7% percent over the last 12 months before the 0.6% increase in August on a seasonally adjusted basis, following a 0.2% increase in July. Concurrently, supplier costs that escalated during the past three years are now retreating. An analysis of the top 10 companies in the Dow Jones U.S. Consumer Goods Index shows COGS – the area where product input costs manifest – down from a peak of 50.8% in Q1 2022 to 46.4% by Q4.

These companies are demonstrating the power of a dynamic pricing strategy to drive profitability, one that more closely aligns to notions of customer value as opposed to more simplistic pricing strategies such as cost-plus.

Don’t leave margin on the table

Given that consumers are willing to pay more for certain products than previously expected, simplistic pricing strategies like a cost-plus model are literally leaving margin on the table. After all, the right price for a product is the one the consumer is willing to pay.

Tips for establishing a proactive pricing mindset

Traditionally, companies used pricing strategies that were based on these parameters:

• What are our customers willing to pay for the product?
• What are our costs and our desired margins?
• How do we set prices in a way that helps us increase market share?

Proactive pricing goes a step further and forces companies to also ask themselves these questions:

• How much can we convince our customers to pay for a product, given the perceived value of the product or service?
• Does that value vary by customer?
• What costs are required to deliver the products to market profitably?
• How do we structure our customer offerings to drive competitive advantage?

It’s important to remember that markets are efficient, and that the higher-margin environment isn’t going to last forever. This window of opportunity is here now, at a point where competitive pressures have yet to ultimately drive down consumer prices to pre-pandemic levels. A solid, proactive pricing strategy will go a long way in the short term, and it should be rooted in an understanding of the true value of your product in your consumers’ eyes.

What does CohnReznick think?

Right now, there’s a sense of uncertainty about what’s going to happen during the final quarter of the year. The Fed may or may not continue to raise rates in an effort to further tamp down inflation, labor costs may continue to escalate, and other variables may come into play as 2023 winds down. These uncertainties could potentially increase the costs of doing business for consumer companies. 

For now, at least, the data has revealed a marked decline in inflation. What we do expect to see is smart companies testing the limits of keeping prices high for as long as they possibly can to capitalize on higher profit margins.

Contact

Jeff Wissink, Principal, Performance Improvement, Transaction Advisory Services

312.508.5810

Stephen M. Wyss, CPA, Partner, Consumer Industry Leader

646.625.5758