why commodity pricing keeps CROs up at night

Nothing destroys business value faster than lack of speed and agility by pricing teams or lack of effective guidance for sales teams. One of the best ways to illustrate this is by looking at a standard price management change process and how small margin leaks can become systematic vectors for commodity price risk.

For every dollar in price increase, top-quartile companies realize $0.95 while bottom quartile companies get $0.42. For every $1 billion in sales, this represents lost margin anywhere between $500,000 and $5,800,000 every time new costs or strategy changes require price updates.

Volatility creates margin compression, erodes value, and degrades customer relationships. This is a true nightmare scenario for a chief revenue officer.

Commodity price risk is what drives uncertainty around sales profitability for perceived-to-be or actual commodity products.

Financial forecasts are at risk because sales teams are at the mercy of uncontrolled market forces. Costs can change at any moment based on government policy, conflict, weather, competition, or any number of factors.

Commodity pricing strategies for better price management

The risk of margin compression is relentless when sales and pricing teams lack the speed and agility to anticipate and effectively react to costing, pricing, and marketing strategy across the value chain.

If you’re a CRO looking to fight margin erosion, you have a couple price management options:

• Real-time commodity pricing: World-class sales organizations are increasing both their speed and effectiveness by simulating margin impact of cost and strategy changes and allocation scenarios. When done in real-time, effective commodity pricing strategies retain and grow margins.
• Optimized sales guidance: Top organizations also are providing their sales teams with optimized pricing and negotiation guardrails. Real-time access to AI-optimized pricing guidance and decision support increases price realization and reduces margin erosion.

Industry trends and pricing implications

Effective price management means keeping a close eye on industry trends. CROs can prepare for the future by watching these trends in the automotive, industrial manufacturing, and distribution markets.

There are more than 284 million vehicles on the road according to a recent S&P Global Mobility report. More importantly, the average vehicle age has increased to 12.5 years.

A rising vehicle population is generally good for automotive aftermarket parts companies, however steep cost increases and volatility are causing repair shops to buy more private-label parts.

Eucon data shows that US and Canadian OEM and independent aftermarket prices have increased by more than 20% between 2019 and 2022.

The industrial manufacturing landscape has the same dynamics. In the case of high-tech, geopolitical and trade considerations as well as supply chain and inventories are ongoing concerns.

For more resource intensive industries, volatility is still the top driving factor, along with long-term projections for the economy and inflation.

CRO price management strategies

To prepare for these rapidly changing market conditions, CROs should take these three steps:

1. Look to increase the number of price changes, improve cost/margin allocation strategies, and evaluate all discounting and promotional policies;
2. Expand good, better, best, or other similar differentiated product tier strategy programs to retain current customers and prevent margin erosion; and
3. Increase volume-based incentive and rebate programs, or modify program thresholds to help maintain volume and retain customers.

Wholesale distribution trends and strategies

North American demand is stabilizing, but European markets appear to be slowing at the end of this year and into 2024. Overall orders are down, or at a minimum, customers are less likely to purchase far in advance.

Supply chains are stabilizing from the initial lack of supply during COVID, followed by over-ordering, then production delays, and finally higher inventories in late 2022 as supply chains untangled and inventories normalized. Still, caution is the watchword for distribution and supply chains.

The June 2023 Manufacturing PMI® registered 46%, nearly 1% lower than May and marking seven months of contraction after 30 months of expansion.

An additional Federal Reserve rate hike at the end of July moved the benchmark short-term rate to 5.3%, a 22-year high after 11 increases in 17 months. With 3% year-over-year inflation, the markets are moving ever closer to an end in this cycle.

Distributors should balance “purchase-focused” and “demand-focused” needs while avoiding aggressive forward-buy tactics as inventory dynamics have reverted to a more cautious footing.

They also should maximize manufacturer programs to drive margin and encourage win-win channel relationships, even if that means at times buying ahead or moving spend between manufacturers or categories.

It’s also time to optimize inventory by identifying slow-moving and fast-moving stock and price it accordingly. And don’t forget the customer; not having an item available where and when they need it can damage customer experience, resulting in lost sales and future opportunities.

Finally, be cautious while using historical data. Outlier behavior in recent years has made historical difficult to use for forecasting, planning, and price management. Optimization decisions need to be forward looking and account for a complex business environment.