Episode 28 May 04, 2021

Pricing in Times of Inflation with pwc’s David Moss

Today we are joined by pwc Consumer Markets Pricing and Profitability Practice Leader David Moss, for a timely conversation on pricing strategy amidst an impending inflationary period. David brings decades of consulting experience to our discussion, sharing strategies forged in the crucible of the 2008-2012 joint environment of inflation and recession.

Listen to hear the latest concerns and approaches David is seeing among his client base regarding inflation and the short-term and long-term tactics he recommends for both market leaders and followers. You’ll learn how pwc consulting services combine with Zilliant pricing software to bring clients a comprehensive strategy-to-execution solution to quell inflationary pressures.

David Moss

David Moss

Your market maker really should be going first. So, my advice to the leaders is lead. Go out, take price, see how the rest of the market works. Now the followers need to be ready to take price quite quickly.
- David Moss, pwc

Episode Transcript

David Moss: Your market maker really should be going first. So, my advice to the leaders is lead. Go out, take price, see how the rest of the market works. Now the followers need to be ready to take price quite quickly.

Lindsay Duran: Hi, my name's Lindsay Duran. And I'm the Chief Marketing Officer at Zilliant. I'll be your host for today's episode of B2B Reimagined. [00:01:00] I'm joined today by David Moss, Consumer Markets Pricing and Profitability Practice Leader at pwc. David. Welcome to B2B Reimagined.

David Moss: Thanks for having me. I'm really excited to chat with you today about pricing and inflation and the partnership with Zilliant.

Lindsay Duran: Excellent. Before we dive into our topic for this episode, why don't you tell us a little bit about yourself and about your role at pwc?

David Moss: Thanks. I'm a partner out of the Atlanta office. I've been with Price Waterhouse Coopers for over 21 years, focusing on pricing and analytics.

Our practice does really everything from pricing strategy through to execution. We pride ourselves on being the partners with our clients that roll up our sleeves and really get the job done end-to-end until it makes sure that our clients receive a lot of [00:02:00] value. Previous to working with pwc in this area, I also had a number of roles with Unilever for seven years.

Lindsay Duran: Excellent. We're thrilled to have you on. So, today I think we want to do a little forecasting looking beyond COVID and really talk about what may be a coming inflationary period. And specifically, I'd like to talk about how manufacturers can plan ahead.

So, as things returned to normal, really the light at the end of the tunnel, won't be without its own challenges and namely inflation. So, I know that many businesses are starting to ask: “How do I price ahead of those inflationary pressures?” So, given that, David, what are you hearing from your customers and what were some of your experiences with helping companies deal with the last big inflationary period?

David Moss: First I'd say is that, starting today is probably almost too [00:03:00] late because this inflationary spike that we're seeing now is hitting my clients really hard. And some are scrambling to get out in front of it. I think that if companies where the capability hasn't been invested in the past are probably at the biggest disadvantage because there's really three steps to the process.

One is to understand what the inflationary impact is at the finished goods level. Most companies have a pretty good idea about input inflation, but converting that to; “What does this product and customer combination, what is that impact?” That's something that companies are not as equipped at. And then second step is “What does that do to my overall pricing architecture? So, if I'm going to take price, is that across the board? Is it surgical? Is it going to mess up my overall architecture? If I have good, better and best offerings, what does that do for it?”

And what [00:04:00] we find is the best companies in that second step, do both of these things together is that they think about taking price from inflationary reasons, but also, doing a little window dressing on their price product architecture that may have gotten out of whack over time. And then lastly, I think is the sell in: “What is the story to sell it in? What's the timing? What period? How long do you expect it to take to recoup the inflationary losses or the expected losses?”

And so, all of that, those steps take time. So, we've seen clients right now think about a two or three step process signal to the market. It's coming. Take the time to do the work and then maybe have a first and a second price increase. We've also seen approaches where you take some initial list price increases, and then you deal back some discounts that are based on very pay-for-performance style of where you earn [00:05:00] those discounts. 

Ultimately some clients, some of their customers can do it and some can't. And that is effectively a price increase when you make it a little tougher to earn some of that discounts as a second step. So, people have been very creative.

The core part of your question is how do you get out in front of it? You got to work, I think, almost backwards because it's coming so fast. The second part of your question is what happened the last time this happened? The last time I saw this was a similar situation, and I think it also had to do with just the integrity of a company's ability to be profitable. Because it became, this was now going back to a combination of inflationary pressures along with some of the major financial crisis that we had, and not being able to get out in front and really forecast this created some real like board-level issues.

And so they were remediation type pieces of work going on just to make sure that: “Do we have [00:06:00] control over this business?” So, we can get out of hand pretty quickly. Now that's a pretty extreme case because we had a financial crisis as well as inflation happening at the same time. We had a little bit of a spike a couple of years ago with distribution-based inflation.

There was a big drought or scarcity of drivers and freight inflation went through the roof for a while. And that was tough on a lot of our clients because maybe they were thinking about additional commodities but were not necessarily thinking about freight or labor type costs. Our approaches to really think about it all.

Lindsay Duran: Excellent. I think that's a lot of great advice and really is, what I'm hearing is you're recommending that people take action very early. Right? And it's more of a long-term play to combat any kind of pending inflationary pressures. What if companies are a little bit behind the eight ball, if you will? What are some short-term approaches that you would recommend companies take to try to catch up?

David Moss: Yeah, that's a great question. And it is what a lot of what [00:07:00] we're seeing in the marketplace is if companies have not invested in the capability, they haven't flexed these muscles. Or maybe these muscles are a little bit out of shape, and they need to be rekindled. Companies have to think about: “Do I want to take a blunt approach? …have a list price increase that is across the board?”

It's not surgical, but take let's just make a, make up a number, take 70% of what you think the inflationary pressure is, signal to the marketplace that this is the first of many or the first of two, at least. And then take the time to really get your long-term pricing with inflation in order. And three months later, six months later, take a second increase that could be at the list price level, or it could be a discount or it could be through maybe limiting discounts or limiting promotions, making them a little less [00:08:00] rich, maybe not as depth or maybe lower frequencies. And really use all the leavers you can in that second approach. Once you've really thought through what your long-term architecture should be. But you don't want to wait.

That's I think the worst thing you've got to do something soon. So even if you make a guess at what you think the right level should be, and you are conservative and don't take it all, you need to do something because every month that goes by, at least by all of our forecasts, for most of the areas of the economy, things are moving up right now, not down.

Lindsay Duran: Absolutely. And I think we've seen, with our customers in particular, from an input cost perspective, for those that rely heavily on steel, prices are up considerably, but really that seems to be across the commodity space. And just this past week or two, companies like Proctor & Gamble and other CPG-oriented companies announced longer term [00:09:00] price increases.

How do you see that playing out on the CPG side of things?

David Moss: Yeah, I think that those announcements that we've seen or a combination. There are some list price increases. There's also smaller pack sizes. So, keeping the price the same, but not putting as much into the package. So, an effective per unit price increase. But their cost of good soul goes down because they don't put as much in. And those are good strategies, but you can only do those for so long. Right? Because you can't make your packages infinitely smaller and smaller. So, I think that those are good examples of, I think, initial moves with more to come. And I think if you read the fine print of those announcements, they're also signaling or hinting that there is more to come is that it's a ‘wait and see’ situation. On the one hand it's ‘wait and see,’ to see if the current forecast, which seemed to be going up continuing to go up. But on the [00:10:00] other hand, it's a ‘wait and see’ to give them more time to think through their longer-term strategies. Because these companies who have been doing it for a long time in CPG, they do have pretty sophisticated capabilities that they can work out what the long-term approach would be. They also want to be smart about, and very clear about their communication of the pricing. So, I think that you're just seeing the beginning of a series of a price taking. I also feel that when you have a company's leader, like Proctor & Gamble, one of the premier CPG players, when you have someone like that make those announcements, then it makes, I think, other companies want to follow and feel courageous to do. Because I think taking price sometimes is seen as something that is negative.

It actually is the way of the world. And it doesn't need to be negative in any way. It's [00:11:00] really about making sure that the entire value chain is healthy. And it's something that you need to do on a regular basis.

Lindsay Duran: I think that's a great point to make

David Moss: Before you go away, I want to just make one point about the regular, what you said about it, as far as it being regular basis if you don't mind.

I think that when the companies can set up facts and data to support their position on a more, I wouldn't say real-time basis, close to real-time on a regular basis, and they're tracking this all the time, they're able to have reasonable conversations on a continuing basis with their customers to say: “Hey, things are looking good or it's a little rocky, or it could get worse.”

And those kinds of ongoing communications are really the way to manage this. Not for it to be a, ‘something I only address every three years when it really melts to a point where I have to.’ It's much better to be little and often than to have [00:12:00] big shock increases every so often. So, I think much more annual or semi-annual approaches is a much better way to do this and then having the tools and infrastructure to track it is the way to go.

Lindsay Duran: Excellent. So, thinking along the lines of the tools and infrastructure comment that you just made, David, many of our listeners might be asking: “What data do I need and how can I get the data that I needed in order to properly execute on strategies?”

David Moss: Yeah. I think, companies like yours, Zilliant, that have a lot of data infrastructure templates and approach are in a great position to have the companies have the right pricing data, to be able to translate the inflationary information into pricing actions or pricing simulations then. Because you guys have many simulation capabilities. I think that's the one side. But the other side is translating.

I mentioned this at the beginning, translating the commodities into a finished good. Because you'll have both [00:13:00] labor as well as direct costs and even things like freight that might not meet necessarily in the bill of materials, but in the total landed cost that goes into getting a product to market.

And so, looking at that holistically and translating it on a very regular basis to your costing so that you understand your margin compression is absolutely key. And this is not the traditional manufacturers updating their standard cost or rolling variances each month into a standard cost approach.

That's part of it. This is really looking holistically at tracking external commodities, right? An external input costs for what's happening in the marketplace that everyone has to play by those rules. If your company has hedged or bought early or gotten lucky with lower costs that's good management. That doesn't necessarily mean that you need to give that [00:14:00] great management a way to your customers. Because the market is dealing with the overall commodity pressures.

I hear a lot of clients, I think, tied up between what I'd call internal inflation, which is what your true costs are internally based on all your hedging and future buying strategies. And external inflation, which is what the market will bear right now today on a spot market. And it's that external approach is where you should be setting your prices.

So, if you've done well, you should try to keep that margin as opposed to our pass it along strategically to key clients. It's not something that you want to just automatically give away to your customers because you took that risk when you made that hedge. You had to pay a price for that option. If you were right in doing so, then that should go into your coffers, into your bottom line or into future savings or future investment, I should say.

Lindsay Duran: [00:15:00] That makes perfect sense. Let me ask from a slightly different angle. So certainly, no one is operating in a vacuum and we're all looking at different competitor situations in different market positions. But I think about companies that are the leader position in a given industry or market versus more of a follower position or new entry position. How might companies in those varying positions think about when and how to take price up?

David Moss: Yeah, the leaders and that could be number one or number two position, really have a responsibility to take price, to set price to the overall market. And the players that are further behind, three on, are going to look to that market leader and to be the price setter. If a smaller player moves early, they run a risk that no one will follow, or they could be taken advantage of because they're not in a dominant [00:16:00] position to make the market. So, they're your market maker really should be going first. So, my advice to the leaders is lead. Go out, take price, see how the rest of the market works.

Now the followers need to be ready to take price quite quickly. So, they might want to wait to see what the announcements are but have their plans ready. Then they might want to move first. If there's three or so big players, all with similar markets chairs, who goes first? There may be a tradition in it. You want to think about what those scenarios are.

And that's one reason why I think taking, going out first in positioning, there could be more to come, is a smart way to do it. Because you can also ‘wait to see’ who follows or not. Obviously, you have to be very careful with how this is communicated for all sorts of pricing statutory rules and regulations, and you don't want to get into any kind of anti-competitive situation.

However, having clear, press [00:17:00] release type statements just makes it much better for everyone to understand your position. And then the overall marketplace then decides how they want to react.

Lindsay Duran: That's great. Thank you. I think really good advice, especially for the leaders to make sure that they're taking an overall clear price position.

David Moss: We play war gaming and there's also pricing theories and gaming theories that you can apply. Then you want to war game and run through the scenarios of: “What happens if someone doesn't follow? Or what happens if someone follows, but they increased price more? Or what happens if they just are in lockstep with our price increase?” You want to play all those scenarios out and think through your worst-case situation before you make a move.

But I wouldn't want to overanalyze because clear communication and moving first is rarely a bad situation.

Lindsay Duran: And I think what you're describing, much [00:18:00] of that David, with the war gaming, is really where the intersection of the Zilliant and pwc partnership come into play. Right? With pwc on the strategy side of things and Zilliant providing the robust tool set.

Can you talk a little bit about how companies can take advantage of that strategy plus execution and tool set to really make a difference in their pricing execution and their margin performance?

David Moss: Yeah, absolutely. I think ultimately figuring out what your pricing strategy is and your pricing architecture and your good, better, best, and premium offerings.

That is a lot about looking at the overall marketplace and where you're growing and where you're not, and where you want to be in the future. And pwc is in a good spot to help clients and customers get to that point and do the fact-based thinking. But ultimately, none of that matters if you can't execute it. Right? You've got to be able to then go out [00:19:00] and update a number of skews, and you've got to be able to monitor and track. And use data and optimization algorithms to see how your pricing is doing at the detailed level. Because you may not need a price increase. Maybe you need a change in mix. Maybe you change prices on certain skews to influence mix. And that will get you to where you need to be from an inflationary pressure perspective.

So, having the analytical tools and the execution pricing systems that Zilliant has is a way to do that. And you put those two in combination, not only are you able to execute your pricing strategy in a seamless way, you're also putting in infrastructure that allows you to be monitoring and making micro changes on the fly so that you don't get yourself in the position that we talked about at the beginning of the chat where you're on the back heel. You're on your back foot [00:20:00] having to deal with a lot of commodity pressure. So, a combination of good strategy and good systems allows you to, you're never going to be on autopilot, but you're going to be in a much better position following and tracking this along the way than you would be if you were just treating this like a project every now and then. You really want to build a capability.

Lindsay Duran: I think that's a great point about building the capability and it being an ongoing just way in which you run your business. One thing that comes to mind for me, that I think really completes the puzzle, is that companies should not forget about the change management required in order to make managing price in this way. The way in which you run your business. Right? That your new normal. And so that often requires a bit of a heavy lift at first with the sales organization in particular, as you're trying to roll out new ways of pricing or [00:21:00] thinking about pricing or how salespeople should make pricing decisions overall.

David, can you speak to some of the services that pwc provides in terms of helping companies address that change management challenge?

David Moss: Absolutely. Change management comes in a lot of forms. There's communication, making sure that the change in direction is clearly communicated to everyone, all the stakeholders who matter internally.

And how and what is the communication protocols for external clients. So just being clear about what the change is and not being wishy-washy. There's also a whole, I think fact-based approach to this. I think businesspeople have an intuition as to what the price should be from a lot of their experience in using facts and using the data that comes from analytics to show.

And why a price needs to be changed or [00:22:00] moved up or wavy wire price should be moved down. If we want to use the price elasticity curves to increase volume, those are changed management tools as well because people stand on what needs to be done. But they also want to know why it needs to be done. And when you are able to really ingrain the ‘why’ into your frontline salespeople, you really give them the power of general management.

And our theory is you want to have change management, be more about a personal experience that gets the thinking of the CEO in the heads of the salesperson. And so, if the CEO was there with you on the sales call, we don't want it to be a different outcome. And so, by getting all those facts and details, and really infusing the general management thinking into the frontline, you really get a much better result.

And then people can start to make the right [00:23:00] decisions, even without all the analytics, because they really understand what's out there. And I think the last thing is good old-fashioned on the job training. This is, we view pricing is a little bit of an apprentice game. And so, the more you work on training and where we believe little and often, not big, long courses, but learning bursts - we call them inside pwc.

Those are very helpful to have people build. We also have more extensive approaches, where you get proper certification and badges and you work your way up from a beginner to maybe, a green belt and then ultimately a back black belt for power users. There's a lot that goes into making it stick.

And we can't overemphasize. I know sometimes clients are hesitant to invest in change management because it sounds the squishy stuff. But if I look back at all of the times something didn't work out, for ours, it was because the change [00:24:00] management wasn't invested in. And while you had really good ideas by putting in the systems and the analytics, those weren't getting executed out on the street, the feet on the street, because the change management side was neglected, or maybe just halfway done.

Lindsay Duran: I think that's a great last point to end on, David. I'd like to thank you so much for joining us for this episode. You've given us a lot of great ideas to consider and a lot of perspective, especially as we all come out of this COVID period and are entering this inflationary period. I think a lot of valuable advice for company leaders to take heat up. So, thanks for being here.

David Moss: Thank you so much for having me. I've really enjoyed it. I appreciate the partnership with Zilliant. As you alluded to you with some of the questions. I think putting the systems and the strategy and the change management all together in one package really gets our clients to a point to where they can become leading [00:25:00] pricers themselves and they're left with the capability.

So, I appreciate the partnership and looking forward to continuing the conversation.

Lindsay Duran: Absolutely. And I'd like to thank each of our podcast listeners for being with us for this episode. If you're interested in learning more about Zilliant’s and pwc’s partnership, you can take a look at the show notes for a link to a recent joint webinar.

This concludes our podcast. Please rate and review the show as it helps us to continue to put out great free content. And until next time, have a great day.

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