Mark McDonald

Over the summer McKinsey published their top 10 trends for the next year or so in Harvard Business Review in July 2009 http://tinyurl.com/l2ooj3.  This post discusses the trend related to the future stability of prices.

Price stability in question – an accelerating trend

McKinsey’s final trend to watch involves price stability something that executives had not had to deal with for almost 20 years and will have to deal with in the future.  Rather than predict inflation or even deflation, McKinsey point out that either way price instability is on the horizon.

Recent financial stimulus and accommodating monetary policy will require central banks to “destroy all of this money” according to former Federal Reserve Vice Chairman Alan Blinder.

This is not just a U.S. issue, in fact absorbing global monetary stimulus has more in common with sequestering carbon and other green house gasses.  Using this analogy, central bankers will either injecting this money into the capital markets through higher interest rates or diffusing Euros, dollars, yen, etc into inflated prices or devalued currencies.  In either case, price instability is on the executive agenda.

Executives will have to deal with pricing issues that they have not had to address for more than 20 years.  Cost rather than price has been the primary focus of management at many companies.  Earnings growth has come through a mix with their focus on driving earnings through building or buying sales volume through M&A and expense management.

McKinsey recommends flexibility and taking a cautious approach when dealing with this trend.  Caution, in this sense, involves matching costs with pricing in order to protect margins and looking to match pricing and cost structures.  The recommendation is sound, however it is incomplete.  Given that companies will face price instability, every company needs to find a way to raise their pricing power.

A price increase is not pricing power.  As an example, consider pricing increases in the consumer products industry where increased commodity costs drove price increases.  It is true that these increases have largely held but branded CPG companies face increased pressure from lower cost private label products.

Pricing power can be defined in the ability to set prices without adversely effecting sales volumes.  Pricing power has eroded from global competition, increased price transparency, and rising consumer choice.  Companies gain pricing power through differentiating their products and services and improve their match with customer segments.

Information and technology play a role in enhancing pricing power in several ways including:

• Enhancing market and customer intelligence to improve targeting and matching customers with products and services. Effective matching reduces substitution pressures and raising pricing power through marketing, sales and customer acquisition.

• Increasing customer content, contribution and collaboration in providing their product and services that enable customers to see themselves and use your offerings to meet their needs. When customers see themselves in your products their value increases dramatically creating pricing power through your product capabilities.

• Improve internal operations to increase availability and reduce customer cycle time and costs which enable you to integrate with their processes and value proposition. This is pricing power that comes through customer fulfillment and supply chain capabilities.

Executives can see price instability as something beyond their control making cost management the response to pricing power.  Cutting your way to profitability certainly represents an immediate and sound management approach, however it has limits.  Inflation or even deflation will require a response, benefiting those who have pricing power more than those who feel powerless in the face pricing change.

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Category: 2010 Economy Leadership Strategy     Tags: 2010 planning, Business Leadership, IT and Business

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