How to Use Pricing Strategy to Lessen the Impact of Supply Chain Issues
Many businesses continue to be affected by the supply chain issues brought by Covid-19. As lockdowns have lifted, demand has soared, and supply chains are struggling to meet this demand due to a shortage of labor and materials. Kim Watson, Director Strategic Consulting at PROS states “Inflation is at its highest point in decades, demand continues to be volatile, and supply chain interruptions and production issues have led to almost daily changes in manufacturing capacity and costs.”
Volatility in the supply chain is now the norm.
How Supply Chain Issues Impact Your Financials
The two major impacts of supply chain challenges are margin leakage (due to higher costs and inflexible pricing) and revenue loss (because growth is more challenging when supply does not meet demand).
One of the biggest challenges that product-based businesses face is how to increase their margins and grow revenue while also responding rapidly to external market conditions including supply chain challenges. Due to supply chain issues, there’s a higher risk to the bottom line than we’ve ever seen before. While business cannot resolve supply chain challenges or change market conditions, they can pivot their pricing strategy to mitigate some of the effects. We’ll explain here why price optimization and management (PO&M) software is the only way to do this.
Sound Pricing Strategy is the Answer
Watson states that “Pricing is always the most important lever” when trying to resolve profitability issues. Standard, legacy pricing no longer drives margin goals in today’s landscape. A pivot in pricing strategy, then, is the first thing businesses should consider when looking to shrink margin loss and grow revenue. Kim goes on to say that a 1% uplift in price yields a 9% uplift in operating profits.
Many companies are ill-prepared to deal with this environment, leaving both sales and margin at risk. To protect profitability companies must model, execute, and analyze pricing at a higher level of granularity and precision than ever before.
To be accurate and appropriate, pricing must take into consideration all supply chain factors, but also market demand, competitor pricing, and inflation – and can be even further refined for profitability when considering customer segment, product combinations, buyer history, product category, warranties, and rebates among other things. This isn’t simple or quick: AI-based technology and automation are required.
How AI-backed Pricing Tools Drive Pricing and Margin Recovery
With AI-backed pricing optimization and management solution software (known as PO&M in the marketplace) you can respond to develop pricing strategies that account for market dynamics immediately and quickly in order to improve margins and drive up sales. Companies that leverage AI to recoup revenue and profit losses will not just recover margin, but can actually capitalize on the volatility of these pandemic-driven markets.
And, it seems that consumers are accepting of (and confident in) AI generated pricing.
The importance of AI in the future of managing the financial effects of supply chain issues can not be emphasized enough. Most POM technology has algorithms that take into account things like market dynamics, competitor dynamics, previous buying patterns, and other variables to set a pricing ‘envelope’ - including the floor price, target price, and the expert price. With this knowledge, the sales teams can build more accurate quotes that are both personalized to the sale for that customer and optimized for the financial impact of supply chain challenges.
AI provides dynamic price recommendations that look at all market factors and historical purchasing data in order to balance maximized value for businesses with customers’ willingness-to-pay, thus increasing win rates and buyer engagement, and reducing unnecessary negotiations.
When it comes to poring through vast amounts of data, nothing is as thorough and accurate as AI. For pricing strategies to be viable and effective, the technology needs to be constantly mining through huge amounts of data from a wide variety of sources, much of which is in a constant state of change.
Staying Ahead of the Game
The field of price optimization is constantly evolving. With so many variables and vast amounts of data, creating tools that stay at the cutting edge is a challenge. As the market-leaders in the field we work hard to make sure our research and products continue to be cutting edge. For example, we have developed a feature called “Multiple Perspectives” that allows users to apply different sets of attributes, configurations, or new science modules, providing the ability to better leverage pricing scenarios, view multiple perspectives, and simulate recommendations. This enables users to better optimize and enable omnichannel pricing strategies.
Businesses that don’t solve their supply chain-related margin and pricing issues and are hit by a rise in inflation which is currently at its highest point in decades, could end up in a situation they can’t recover from. The PROS Platform can help prevent this by using AI-driven algorithms to keep your pricing optimized, to take into account sudden changes in material costs, competitor pricing, previous customer buying patterns and other changes in market conditions, all without the need for human intervention.
PROS Holdings, Inc. (NYSE:PRO) is a leading provider of SaaS solutions that optimize shopping and selling experiences. Built on the PROS Platform, these intelligent solutions leverage business AI, intuitive user experiences and process automation to deliver frictionless, personalized purchasing experiences designed to meet the real-time demands of today’s B2B and B2C omnichannel shoppers, regardless of industry. To learn more, visit www.pros.com.