AI: Helping businesses navigate the pressures of inflation

UK businesses are being hit by the highest levels of inflation in over 30 years, with Input Producer Price Inflation hitting 13.6% on the year to January 2022. In comparison, output price inflation was 9.9 percent during the same period. The fallout from Covid-19 is driving up the cost of raw materials and disrupting global supply chains, not to mention the impact of Brexit and the Ukrainian war. Many businesses are reviewing their pricing processes as a result of the cumulative impact of these factors.

Input costs in certain industries have increased dramatically in a very short period of time. If we just look at the 12 month period from July 2020 to June 2021, the price of copper increased 50%, containerised freight increased 159% and cold rolled steel increased 200%.

In addition, global supply chain disruptions have resulted in global shortages of a number of raw materials and components. This has resulted in production being cut, lead times being extended, or inferior or more expensive substitutes being procured.

As a result of all this disruption, businesses are facing a number of challenges, that need new strategies, processes and technology to address. The frequency and size of price increases required to maintain margin are significantly higher than most businesses have been accustomed to.

Current Pricing Challenges

Companies that have not executed regular price adjustments, now need to pass on price increases to their customers, that are significantly higher than most will have experienced in their professional lives. In the current market scenario, mistakes in pricing will cause major losses in revenue and further accelerate price erosion.

As a result, companies need to figure out a price increase strategy that will enable margins to be maintained, whilst also maintaining customer trust and competitor positioning.  

Improving Pricing Practices

The ongoing volatility affecting product costs, labour costs and factory overheads has been the trigger for well-run companies to review and overhaul their pricing strategies and practices.

Organisations that grasp the nettle and adopt more dynamic pricing practices contain margin erosion much better than companies that remain static and reactive. Therefore, companies must do the following in order to succeed:

• Become More Nimble and Agile as an Organisation - Companies are being forced to move away from their traditional annual price increase processes. They need to have the capability to promptly refine their pricing strategy, enabling them to be more responsive whilst maintaining the trust of their customers.
• Establish Insights into Price Drivers – Organisations must have a granular understanding of their price waterfall, they need to comprehend actual changes to material costs, labour costs and factory overheads. Ideally, be in a position to forecast how these will change in the immediate future.
• Understand Pricing Opportunities and Leverage AI - Understand a business’ historic price increase attainment performance. Understand where agreement terms and conditions restrict one’s ability to execute price increases. Companies must use Artificial Intelligence to predict their customers’ willingness to pay and understand the gap to current prices. Building a picture of all this, will enable price increases that can be targeted to where they will have the most likelihood of being accepted.
• Establish Product Relevant Dynamic Pricing Strategies – Businesses must establish a strategy that enables them to protect margins but stay competitive. Priority should be given to quick and transparent cost pass-through for price sensitive commodities. For differentiated products and services a clear understanding of customer value, competitive positioning and future supply vs demand needs should be taken into account, to help ensure margins are protected
• Communicate Effectively to Customers - Like any other change, price adjustments need a strong change management process enabled in order to achieve maximum effectiveness. A clear rationale for the price increase needs to be developed and the sales team needs to be appropriately enabled to ensure this rationale is communicated effectively. A transparent mechanism should be communicated and once done effectively, it will help lay the ground for future increases.

What Next?

It is critical for businesses to be able to execute on the above in a timely and efficient manner. Companies that have the right tools and systems in place to make informed decisions on time will outperform their competitors. Organisations that use AI have greater visibility into customer and product profitability, allowing them to analyse data more frequently and implement more targeted price increases. This enables them to device change more quickly, increasing their chances of successfully navigating inflationary periods.

Businesses must look beyond current issues and implement solutions that will benefit them now and, in the future, such as ensuring that they are always providing market-relevant prices that drive the highest margin revenue profitability for the company while accounting for customer relationships and willingness to pay.