Pricing During Inflation

We're in a period of shortages and significant inflation. That makes on time delivery and pricing both difficult challenges. But overcome those challenges we must.

In this podcast I give an example using numbers of how NOT to raise prices during inflation. We learned a lot from the inflation of the 70s and there is no reason to repeat those errors.

The "bad decision" that many make during these times is to try to maintain margin in raising prices to customers. If material and labor prices rise significantly, your cost of goods sold rise. But if you increase prices by the same percentage mark-up as prior, you will price yourself out of the market.

It is important to remember that your margin should reflect your value-add. Just because your costs rose doesn't mean your value-add increased also. The market determines price.

Of course rising cost of goods sold will be detrimental to cash flow. Add to that the customers that choose to extend payment terms to you and cash flow can be damaging. It is fair and reasonable to increase your prices to reflect that slower cash flow.

The question behind all of this is, will your customers accept rising prices? Especially if your lead times are unpredictable.

If you've ever needed to understand and demonstrate true partnership with proactive communication, now is the time.

Obviously you must cover your costs and make enough to invest in the future. To do that your customers must believe you are treating them fairly and that you are in this inflation thing together. We're all dealing with it.

Don't give your market any reason to believe you are taking advantage of inflation to gouge them. Be transparent on costs.

The cost-plus pricing model is long dead, but it's easy to fall back on it now. That will not work for more than a very short term.

The market always determines price. It is our job to manage costs and value such that the market price results in profits that reflect the value you add.