“The Price is Right!” (not the game show)
Pricing strategies often feel like a conflict between opposing forces
The supply chain disruptions realized during the COVID event created challenges for businesses of all sizes, all configurations, servicing almost all customer and market segments. Often, the availability of the product was the most frustrating aspect. Businesses requiring a steady revenue stream (and there are few businesses that are not bound by that reality) needed their access to raw materials and/or finished products, to be consistent and reliable. Unfortunately, various elements of the supply chain, from the production lines to the shipping lanes to the final delivery providers, became significantly more tenuous during the height of the pandemic.
To be clear however, sometimes the issues encountered related to the lack of products and services wasn’t as simple as logical conclusions might suggest. Ask anyone who went to look for a car as the pandemic lockdowns started to relax. People were looking forward to hitting the road for travel in a new car, but unfortunately, the early lockdowns in the auto plants resulted in the cancellation of many “just in time” orders for silicon chips. When the overwhelming labor shift to remote work resulted in heightened demand for “work at home” devices, silicon chip fabs reallocated their production to that market segment; home computers, upscale monitors, gaming platforms, smart devices and even basic home electronics, as many decided the time was right to replace old appliances with newer, smarter versions. Once vaccines enabled the restart of auto production lines, the automakers were forced to go to the back of the queue until the production line for their chip needs could be restarted and brought up to speed.
But the supply chain challenges didn’t just encompass product availability. The dynamics of supply and demand came into intense focus as the constrained availability of many products, met the same, or in some cases, even intensified demand. When the supply is constrained, or as in some cases during the pandemic, shocked, the price has no choice but to increase. Two products come to mind, anecdotally: vinyl/nitrile/latex gloves and hand sanitizers.
Gloves represent an example where the supply was shocked. Many production lines in Malaysia were shut down and the supply of gloves started dipping. Production for medical gloves were given priority but even that channel experienced severe supply shortages. As a result the prices being paid by distributors to manufacturers fluctuated almost hourly. If buyers could find a supply partner, they were at the mercy of the prevailing price being asked.
Although less a case of supply that was impacted by exogenous elements, the pricing dynamics that impacted the market for hand sanitizers also bears some investigation. The supply market for hand sanitizers was relatively stable. It was only when demand spiked for hand sanitizers as part of the strategies for preventing the transmission of COVID, the pressure on the existing sanitizer production and inventory resulted in supplier measures to try to maintain some of the stability. Rather than immediate price hikes, allocations were formulated and the priority to health care was implemented. Eventually however, prices rose based on the shift in the demand curve with a stable supply line. In short order, knock off suppliers were trying to formulate bootleg hand sanitizers, seeking to capitalize on the demand spike. This did cause some pricing confusion, but overall, the general sanitizer situation remained less volatile than might have been expected.
In a similar demand scenario, disinfectants were also pressured by huge demand spikes. In that space, suppliers both allocated inventory availability, prioritizing essential spaces first, but many also decided that as an essential cog in the COVID remediation arsenal, they could and should increase pricing for the product to clarify the demand market. As in the case of gloves, there were some murmurs of gouging and taking advantage of the market dynamics by these suppliers. This illustrates the reality that there is often a fine line between market dynamics setting the price and opportunistic profit reaping being involved. Suppliers argue their production and/or products innovations are costly and should be considered in pricing formulation. There are others however, that argue in such situations, the greater community good should be a significant consideration.
These are just a few examples of pricing dynamics as impacted by the extreme event that was the COVID pandemic. There were countless others in every segment of the economy. Because the event was so widespread and impacting the lives of everyone, the necessity to make pricing adjustments to the customer base, was met with very little resistance, or perhaps more accurately, much less resistance that might have occurred under non-pandemic circumstances. The impact to this day is felt as we battle inflation as a key element in assessing the economic condition. But it addresses an important point. Whenever, and for whatever reason, the costs associated with the delivery of products or services increase due to reasonable and directly related production factors, it is imperative that the successful entrepreneur engages with a proactive response and raises prices, reasonably, to their customers. This has to become a mantra for success.
No one likes to see a price hike, whether at the grocery store, at the movie theater, at one’s favorite restaurant or even at the barber shop. But as educated shoppers of products and services, most consumers realize that the rise in energy costs or a breakout of avian flu or an unanticipated shortage of shipping containers, can have a deleterious effect on those providing the products and services being consumed. This effect is most often mediated in the market place, where as consumers, the value of the products and services desired is weighed against the new price point being set by the suppliers.
The conversation about price increases is one that occurs with regularity between clients and advisors, information gatherers, investors and business operators, and in times of supply chain stresses, with even greater frequency. In a consultancy role, it has been helpful to offer this framing of the situation to those who seem reticent or worried about enacting a price increase, either due to the concerns that customers will be “priced out” or that competitors will offer a lower price.
“At the origin of your business with your customer, you negotiated in good faith, offering a price that was suitable for your economic sustainability and acceptable to your customer as to the value of the product or service you were offering. All things being equal, when you are confronted with an increased cost, under the consideration that the cost increase in question is being applied across all market spaces, then increasing the price commensurate to the cost increase, should bring the market value to a par level.”
In other words, if your prices are fair before an increase, raising them in lock step with the cost increases you are incurring, should mean your price is still fair after the increase. Know your business’ value and don’t be bashful about it!
