Inflation and supply chain disruptions have emerged as perhaps the most stubborn challenges brought about by the COVID-19 pandemic and then exacerbated by world events. News reports proclaim that inflation rates are the highest in four decades. It's true. In 2022, inflation, as measured by the Consumer Price Index, showed the largest year-to-year increase since 1982, according to the U.S. Bureau of Labor Statistics' seasonally adjusted data. Contributing to inflation are supply chain bottlenecks including disruptions in intermediate goods, semiconductor shortages, shipping interruptions, and labor shortages.

The good news is that the world is getting the coronavirus under control. The unwelcome news is that inflation and supply chain disruptions spawned by the pandemic will take years to stabilize. While lockdowns and business shutdowns are relics of the past, businesses face a post-pandemic future that is filled with challenges. The consequences of these challenges are now being felt by entrepreneurs and business leaders all over the world.

No matter what service sector you do business in or what industrial sector you operate in, inflation makes it imperative that business leaders make the right strategic decisions. Inflation complicates every aspect of running a business. Left unmanaged, inflation will quickly render profitable businesses marginal and decimate the product and revenue mix that in pre-inflationary times returned handsome profits.

The Importance of Leadership

Price success starts with an unclouded vision articulated by the CEO. Discipline and patience are next along with a tolerance for ambiguity. The results materialize after resistance and vetting from different stakeholders. When Parker Hannifin's then CEO Donald Washkewicz (he retired in 2016) took on the pricing beast, the company improved net income by over 500% and return on net income by 300%. What was Washkewicz's secret to success? It started with discipline. As the CEO, he took a focused effort to acknowledge that at least with some of its products, Parker Hannifin provided value it was not capturing.

The biggest problem Parker Hannifin executives faced was persuading company managers and sales professionals that they would benefit from the new pricing mantra. In the words of one executive, the company had to “reprogram the company's management DNA.” One consequence: the company shifted to align pricing with that recognized value. The company developed the tools to help hungry salespeople effectively confront customers who were clamoring for lower prices. Washkewicz had the confidence to act on the basis of Parker Hannifin's self-professed mission statement: to be a supplier of high-value products and services. He used that knowledge to price with confidence. The Parker Hannifin sales teams took confidence from the CEO's direction and discipline. Results quickly showed the promise of starting with value and demonstrating to customers the benefits they derived from being Parker Hannifin customers. Since his retirement, the firm still has a core value of “quality solutions on time” and “ease of doing business,” which in part continue to support strong earnings and revenue growth.

The CEO or president is usually the ideal executive to continually sponsor changes because, make no mistake about it, resistance to change is real and only a champion at the very top can pull the levers to drive change. Salespeople and their managers must know with absolute certainty that there is a place where the buck stops and attempts to go over the head of the change agent will be fruitless.

With this mindset, companies are ready to identify where and how certain products and services are superior to those of their competitors. Then someone is directed to lead the charge in recognizing that value, quantifying it, putting it into a competitive context, and executing it through an engaged salesforce. Armed with demonstrable value, salespeople can start to feel good about what they are selling. When a customer says there is no value, the salespeople remember who they are, what company they work for, and they begin to price with confidence using value conversations to find the win-win with customers.

As we've collaborated with firms over the years, we've found that for Pricing with Confidence to work, it takes a diligent leader to sponsor change, take control, and empower UVPF (Understand Value, Price Fairly), which is a core process within the organization. That leader may be the CEO as in the case of Parker Hannifin, or it could be the CFO or division president. In all cases, it's best if the senior executive leading the change reports directly to the CEO. That direct line of reporting sends the message that the CEO has the back of the executive leading the change. There must be no doubt among the departments that appealing unpopular pricing changes to the CEO is an effective strategy.

One of our first pricing training programs was with Intel. The semiconductor leader had an engaged senior leadership team but, just as important, they had a VP of Pricing who reported directly to the CEO. Intel made training a key element of the growth of their team and kept value and competitive price strategy at the core of what they offered. Evolving between a skim strategy for emerging technologies and a neutral strategy when the competition, in this case AMD, entered with matching products, Intel also used innovation of newer technologies as a key element of its growth targets for revenue and profitability. Today, Intel is one of the largest chip makers in the world with an astounding 30% net income.

Building the Value-Based Pricing Team

One of the most frequent questions we are asked is where, organizationally, the pricing team should reside in a company. The usual choices are within the marketing, finance, product management, or sales functions. The basic question is what do you want the pricing department to prioritize. Putting the pricing team in any of these areas means that they will comport themselves in line with how the departments are measured. Pricing within the sales organization likely says they will be more revenue focused; in finance they will be more invested in cost and margin; in marketing they will be more fixated on branding and promotion. If they land in product management, sales tend to focus on products versus the overall solution a company can offer. An effective pricing organization should focus on all of these and then some. Pricing is a team sport, but to be successful, pricing needs to focus on generating profit for the firm (Rule One).

Start with the End Goals

What would success for a pricing organization look like, especially given today's economic climate? We went out and asked this question of various leaders, mostly C-Suite leaders from assorted vertical industry segments. From these conversations, four key themes surfaced:

• Stop the bleeding
• Increase speed
• Manage risk
• Find insights that matter

Let's look at each of these themes:

1. Stop the bleeding. Undisciplined pricing practices are a profit killer. To stop the bleeding, discounting goes under a microscope and practices are put in place to stop profit leakages. One image in your microscope is your customers. We spoke to Andrew Fisher, founder and CEO of Myriad360, a West Deptford, New Jersey–based provider of IT infrastructure and solutions. During the pandemic, Myriad360 purposefully went from serving approximately 600 customers to 240 active accounts. The company purposefully fired its unprofitable customers. “The most unprofitable customers were taking up valuable resources and making it difficult to properly service high-value customers,” Fisher said. The end result for the IT solutions company was a smaller revenue base, but higher profitability, higher customer satisfaction, and higher employee engagement.
2. Increase speed refers to making pricing-related decisions quickly based on market volatility. One client has a goal of “sub-second” price changes because they deal with raw materials, and the cost of those are constantly changing in these inflationary times. Speed of price execution is vital for their survival. Automation is fueling their speed. Any time companies can automate their pricing processes, especially for the long tail of customers, the more time and resources they can spend on more strategic customers, and they will continue to profit through inflationary times.
3. Manage risk. While every leader regarded managing risk from their individual perspectives of the markets they served, they all came to the same two conclusions. The first is that every pricing organization must make managing risk an imperative. The second is that diversification is the number one most effective response to minimizing risk. That includes diversification of markets, customers, products, solutions, and even supply chains. The CEO of a major IT manufacturer detailed how the company added more countries to their supply chain processes to mitigate the risks during the pandemic. Another response is customer customization, bespoke offerings, services, and pricing. With the cost of data storage coming down and our ability to do analytics in micro-seconds on large data sets, the world of customization is much easier to execute. This also leads to more collaborative go-to-market strategies with channel partners.
4. Find insights that matter. Don't wait for perfection and don't waste time preparing large, complicated reports. Instead, focus on creating insights at the points of need that are easily actionable. Too many times companies produce reports that are not actionable and, worse, they consume unproductive cycles of time where people argue over numbers and leaders ask to see the data cut in distinct ways to make them look better. We worked with one firm that had a team of 60 professionals consolidating data from multiple platforms to provide insights on pricing. By leveraging an outside data facilitator, we were able to provide actionable insights in a timely manner at a fraction of the cost.

Understand the Capabilities Needed

Based on these end-goals, a successful pricing organization is strategic and has the capability to influence other parts of the organization. They can't be only an operational function where they are changing prices based on what other departments are telling them to do. Nor can they be just a price optimization shop where they sit in IT and manage a software solution that often misses relevant issues inside and outside of the firm.

Here are ten pricing-related competencies that every company should master if they wish to achieve these end goals. This list aligns with the Pricing Leadership Framework outlined in Chapter 1 (Price for Profit).

1. Understand the customer and value
2. Understand the competitors
3. Align pricing to company strategy
4. Create and communicate offerings that align with value
5. Set list price
6. Govern the price
7. Refresh price
8. Employ analytics to track the proper metrics
9. Invest in analytics to create insights
10. Productize: build, enhance, maintain processes with insights that lead to measurable actions

While most of the capabilities are self-explanatory, there are two elements typically lacking in our clients. One is understanding the customer and value. Often the sales leader will tell us that they know their customer really well and will point to an example like, “I went to their kids' graduation party!” Personal relationships with customers are fine, but what we mean here is an intimate understanding of the customers' business—how they generate revenue, cut costs, or mitigate risk by using your solution. This is not a static activity. Customers change, innovate, and explore new markets, so your solutions need to be in step with their evolving needs. Especially in a volatile market, this understanding is the basis for all pricing activities and is a critical capability.

The second capability often missing in clients is the ability to productize. It's one thing to create insights using analytics, but insights are useless until they are implemented. Productizing your insights by building them into key processes is vital for sustained profitability. With one client, we found that an open quote had a higher likelihood of closure if the customer was “touched” at least three times. “Touched” means everything from a salesperson's call to the customer to an opened email reminding a customer of the open quote. It's best to automate such insights. We designed an automated email campaign where customers with at least two touches were automatically emailed for that third touch. Just this simple process doubled the close rates of open quotes.

Support the Value Leader

Senior leadership has the challenging assignment of making sure that everyone in the organization keeps their focus on improving and better leveraging value for customers. To support the value leader, the president or CEO should understand the interconnectivity of departmental activities and implement metrics that track to optimal results for the integrated team rather than a silo approach. The leader should make certain that the approach and process involve everyone in the company. When senior managers have a value focus, they can implement effective controls that begin to look at overall quality of output in production and customer retention. Sales managers can help salespeople focus on more profitable business rather than any business. New goals can evaluate how marketing managers improve the effectiveness of salespeople and how that turns into increased margins and profits for the firm.

There are a number of short-term steps that can facilitate the customer value process and add revenue and profits fairly quickly to the company. Start by asking senior sales and marketing vice presidents how their people create value with their activities. Follow up with even more specific questions:

• Do you have a market segment where salespeople can focus on high-value prospects?
• Does marketing provide the right value messages to make the salespeople's jobs easier?
• Do you have insights that can be shared into how your products and services perform relative to the competition?
• Do you have insights in the performance difference, and can it convert to financial benefits for customers?

What can you do with your offering, positioning, and seller negotiating skills to improve closing rates without using price as the primary lever?

• Are the right salespeople focused on the right accounts?
• Are sales reps trained and motivated to focus on transactions with price buyers only or do they have the skills to drive value with relationship and value-oriented customers?
• How well is your entire team equipped to deal with the aggressive poker playing we see in many deals today?

These questions will drive the company to an outside-in value culture. This will provide the foundation to confidently limit price-only negotiations. Everyone in the organization must be grounded in the reality that they really do provide value to customers and that it's their obligation to leverage that value with fair pricing.

Avoid Urgency

The biggest problem facing business leaders from CEOs to sales professionals is supply chain disruption. Plant closings and labor shortages resulting from the pandemic are decimating the abilities of suppliers to meet the needs of their customers. On the heels of the pandemic, the invasion of Ukraine sent oil prices reeling. The consequential economic sanctions against Russia have already played out in higher prices at the gasoline pump. The disruptions to raw materials needed for supply chains will add to shortages and inflationary pressures. That's causing consumers and companies alike to hoard critical supplies, further exacerbating the problem.

What's an executive (pricing or otherwise) to do? Here's our first piece of advice, and it is perhaps the most important one to start with. What should you do right now? Take a breath. Avoid urgency. Because when many executives respond with snap decisions to a business problem, they invariably react to the wrong problem.

Ken Beyer is CEO of Atlanta-based Transportation Insight Holding Company, a $3.2 billion enterprise that helps client shippers engineer efficient supply chain networks. Beyer believes that the market volatility that we are seeing today will persist for at least a few years. “The supply chain is broken,” Beyer said. “We've all noticed bare shelves in stores, felt the effects of rising inflation, and struggled to forecast changing demands. Moreover, shipping costs continue to rise, capacity remains tight, ships are trapped outside of ports, and uncertainty is a dark cloud hanging over businesses.” Much of the problem is because legacy supply chains were not built for ecommerce; they simply were not ready to manage the spike in ecommerce volume created by the pandemic as consumers shopped from home. “This also created a movement of labor from consumers picking up goods from brick and mortars to a new labor market for deliveries,” Beyer noted. This new labor market created opportunities for new delivery services and shifted labor from warehouses, loading docks, and retail to home deliveries, as an example. This fundamental shift was one of many factors in the labor shortage.

A number of business decisions are made tactically and without sufficient analytical foundation. That is, the response is focused on only a part of the problem using the tools and levers at hand. The results are often sub-optimal in that they don't address the real problem and they spawn unintended consequences and second order effects that often make the problem worse.

The problem for pricing professionals today is twofold. First, pricing professionals are called on to provide leadership in the most turbulent times in four decades. Second—and this is the real problem that the following chapters will address—is that executives today simply do not have the experience or muscle memory to operate in these most challenging of environments. The result is that some leaders often panic and do more harm than good by making reactionary decisions that fail to consider the total pricing environment.

A brief example of how one of our clients navigated the challenges of the pandemic serves to demonstrate the strategic benefits of the practices described in this book. Shortly after the pandemic hit, many of our clients began receiving calls from their customer procurement people asking for price cuts. We advised them to change the conversation from price cuts to how a closer strategic relationship could assure them of a reliable supply chain. We'll talk about this practice in Rule Ten: Deploy Three Practices to Increase Profits.

In the middle of all the alarm about supply chain problems from the pandemic, we were working with one of our clients to better understand where competitors were priced (higher) and why customers bought some of their products (because they had to). That led to a doubling of price. Of course, it took more than just that. Using the pricing discipline we helped instill over the years throughout this client's organization, the leaders were in an excellent position to confront the strategic supply chain issues now looming before them.

It was possible because, with the help of the lessons described in this book, the client had over the years developed a fearless, forward-looking leadership team up and down the organization, confident it had the tools and skills to manage inflation fears and supply chain interruptions. Elsewhere in the book, we will describe more specifically how this client prospered while others struggled, for now here's the view from 10,000 feet.

The client leveraged every one of the ten rules this book establishes for achieving profits in inflationary times. The pricing discipline instilled throughout the pricing and sales teams had succeeded in Kicking the Discounting Habit (Rule Three). They had established sufficient confidence in the value they delivered to Build Your Selling Backbone (Rule Nine) and were using innovation (Rule Six) to Build Give-Gets Muscle (Rule Eight). They were already proficient at execution (Rule Two) and were in the process of establishing an internal group with responsibility for overall strategy of the division (Rule Five).

Briefly, that describes the framework this book successfully exploited by our clients and available to readers and leaders committed to achieving the primary revenue and profitability objectives of their businesses despite inflation and supply chain turbulence. The framework encompasses ten rules or practices that, in coordination, set out a strategic road map to guide business leaders and entrepreneurs. These objectives are to grow the firm's revenues and profits. We believe that if pricing professionals diligently follow the practices described in the following pages, they will be optimally situated to safeguard the revenue and profitability goals their businesses have established despite inflationary complications.

How This Book Is Organized: Ten Rules for Increasing Revenue and Profitability

The heart of Pricing with Confidence is ten rules. Each rule is a reminder to all stakeholders of what is needed to grow both profits and revenue in increasingly inflationary, competitive, price-oriented markets. With one chapter dedicated to each rule, readers will get a detailed explanation of each rule supported by multiple examples and actual case histories directly from our playbook.

We are pleased that you have continued reading this far into the Introduction. As you have noted, the Introduction lays out the case for why pricing in inflationary and supply-constrained conditions requires a new understanding of strategic pricing. We especially recommend the Introduction for readers who are not yet persuaded that high inflation and related supply chain turbulence fundamentally recalibrates established pricing practices.

• Price for Profits. The pricing mantra of Pricers and Leaders should always be to “price for profits.” Companies that successfully manage price over the past few decades have deployed this mantra with tremendous success. Rule One reminds us, when business leaders lose sight of this truth, even temporarily, it results in difficulties that are not easily reversed. Price for Profits is the lodestone of the book, hence its place at number one in the sequence of ten rules. It requires learning from the past and taking initiative. Business leaders cannot Price for Profits on a hunch. Analytics are indispensable, as are quality metrics. Like all simple truths, the operation of Rule One is not difficult to comprehend. Nor is it too difficult to execute if there is a universal commitment on the part of everyone in the business to—primarily—Price for Profits.
• An Ounce of Execution Is Better Than a Pound of Planning. The main takeaway is that a bias for action is one of the hallmarks of effective pricing leaders. While developing a strategy is important, too many businesses squander opportunities by indulging in strategic planning that is obsolete by the time it is finished. Here's a better way. Having good execution systems and people who follow them is an especially important rule for pricing in inflationary and turbulent times. Rule Two discusses where in the corporate hierarchy a value-based pricing organization should reside. Some of the skills associated with Rule Two include how to change sales and customer expectations, how to use analytics to, among other things, identify unprofitable customers, and when to fire them.
• Kick the Discounting Habit. Price discounting is an addiction that is entrenched in many organizations. As with any addiction, the discounting habit is tough to break cold turkey. The best way to dislodge any deep-seated attitude is to replace it with another. A bit of arrogance, feeling good about the value of your products and services, and why the price is the price provides the confidence needed to kick the discounting habit. The chapter begins by describing the problem with discounting, offering practical tips to kick the discounting habit, and analyzing how desperation during inflation can cause pricing professionals to do the wrong thing.
• Know Your Value. It's true the customer has the last word on defining value, but that doesn't mean the business is silent on the matter. Businesses establish value when they do such an excellent job of identifying what matters most to customers and then delivering it consistently so that it earns repeat business. When business leaders fail to establish business value, they squander revenue, lose profits, and fritter away market share as their clients find more favorable offerings. Customer value can be heightened when companies find ways to align their core competencies with their customers' primary go-to-market efforts. Without understanding value, you are doing business in a very dark cave. Understanding the value you and your firm create for your customers is like flooding the cave with light.

  Confidence in negotiation requires confidence in pricing. Confidence in pricing derives from an enterprise-wide understanding of and belief in the value the business delivers to customers. Customers buy your products and services to achieve value. Understanding and living that value is a key to successful pricing.

• Strategy Sets the Direction. Choosing the right pricing is dependent on market conditions, product life cycle, and understanding customers' use cases for your products and services. If the tactics of pricing determine how much to charge for a particular product or service, then product pricing strategy determines whether to price higher, lower, or equal to competition. The main takeaway of this chapter is that pricing strategy should be simple and understood by all, especially the pricing professionals and the salesforce.

  Complex pricing strategies may look good on paper but implementing them becomes impractical. Strategy should be simple and understood by all, especially your pricing people and your salesforce. Complex strategies get in the way of that understanding. In this chapter, you will learn why many approaches fail, compare three basic pricing strategies and when to use them, and discover a pricing strategy focused on capital intensive businesses as well as for businesses offering software and information products.

• Innovate for Growth. Innovation provides the engine of profitable growth and is far more effective than lower prices in establishing a sustainable competitive advantage. Businesses that don't evolve their products in services will fail to meet the evolving needs of customers and leave an opening for competitors. Successful companies are continually looking for ways to improve their product and service offerings. That means smart companies innovate for growth, relentlessly price for profits, understand the basics of a good offering structure, and use solutions and services to create price leverage.
• Understand Your Market. If you are going to succeed with pricing on any level, you must have a clear understanding of how customers and competitors are going to respond to whatever pricing initiative you undertake. In other words, you need to understand that the market is a complex interaction of many players all pursuing their self-interests. If you don't have that comprehensive understanding of how markets operate—particularly your market—and invest the time and resources in developing that understanding, your efforts will backfire. The chapter looks at some elements of basic game theory, asking if you are better at playing checkers or chess. The chapter also introduces The Elasticity Tattoo, defines “derived demand,” and details the obstacles to using pricing to drive growth.
• Build Your Give-Get Muscle. Give-Gets are little gems and the best way to protect price. Salespeople need trade-offs and negotiation tactics, otherwise they continue to be a big source of price leakage. Too often, they just give on price. There's a better way. Negotiating with product and service features as trade-offs are a better way to blunt the poker playing tactics of customers and protect the value of those products and services. This chapter gives readers indispensable tools to use offering structure to win at the negotiating table. It describes the importance of internal alignment on executing Give-Gets. Some of the practices described in Chapter 8 include bundling and how strong fences protect value.
• Build Your Selling Backbone to Add Profits. Backbone (the chief support of a system or organization; figuratively, strength in the face of adversity) provides resilience to your team as the assaults on your pricing strategy mount. The main thrust of Rule Nine is that you can't demonstrate and prove your value if you don't have Backbone. Confidence in negotiation requires confidence in pricing. Confidence in pricing derives from knowing the value of your products or services as perceived by the customer. That requires knowing your customers' requirements, how your solution will make an impact, and the confidence to stand behind the price.

  Backbone also requires knowing the tricks your customers use to get you to drop prices and how to interrupt the cultures that default to deep discounting of products. In such cultures, managers believe that there is no other way. Regardless of product, competition, or geographic location, firms that Sell with Backbone sell more, do it profitably, and actually have a bit more fun.

• Deploy Three Practices to Increase Profits. This chapter reviews three practical ways to dramatically increase profits. The secrets include the powerful concept of UVPF (Understand Value, Price Fairly), how to play better poker, price like the airlines to better leverage resources, and how to increase profits in inflationary times.
• Price with Confidence—The Journey. The conclusion of the book wraps together all of the elements of the ten rules to provide a roadmap for readers to move forward. Themes of the conclusion include building the team, the importance of leadership, and a discussion of the central question, Who owns value?

Now, let's begin with Rule One.