Adam Echter is a partner with global consultancy Simon-Kucher & Partners. He co-wrote the book “Beating Inflation” with Hermann Simon. Views are the author’s own.
While inflation is persisting despite recent signs of some easing, the reality is that prices aren’t merely rising; our currency is losing value. This distinction is critical, and as financial leaders, it’s your duty to navigate these complexities and guide your organizations through them.
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First and foremost, we must recognize what is really happening when inflation rather than value creation causes prices to increase: the purchasing power of our currency is diminishing. This phenomenon, often referred to as currency devaluation, has profound implications for business strategies.
As the value of money declines, the nominal value of goods and services appears to rise. This can lead to damaging complacency if not properly addressed. For example, while it might seem that the value of your assets or revenues is increasing, the real value could be stagnant or even declining.
This “money illusion” jeopardizes your company’s ability to invest in equipment, salaries and R&D. And as CFOs, your mandate is to safeguard your organizations against this risk by ensuring that your monetization strategies account for the devaluation of currency.
Driving real buying power
The 2020s are shaping up to be decidedly different from the 2010s. In the previous decade, the mandate for CFOs was often to expand gross margins by holding prices steady and cutting costs at rates above the average inflation of around 1.8%. This strategy enabled margin expansion without significant price increases.
Today, inflation is still running higher than that the previous decade, making the same approach untenable. First, achieving cost reductions of 4% or more is exceedingly difficult in today’s environment. The suppliers and partners you rely on are experiencing the same inflationary pressures, making it challenging to negotiate cost cuts. Second, the internal teams tasked with cost management are facing rising costs outside raw materials in the form of labor, energy and security. Thus, relying solely on cost-cutting as a long-term solution is no longer viable.
As a result, growth — whether in revenue or profitability — will require price adjustments. This brings us to a critical point: not everyone has the right to raise prices. Price adjustments should reflect the value your products or services offer. There are always products in any market that are increasing in value, remaining stagnant or decreasing in value.
If your product value is stable or increasing — which is the case for the vast majority of companies — you need to at least drive nominal price improvements. This will result in increased nominal dollars, sustaining your real buying power as CFOs and ensuring the health and longevity of your businesses. If your value is expanding, you must drive real price increases beyond nominal measures.
Getting the team onboard
One of the most critical aspects of this strategy is communication. As CFOs, you need to articulate the rationale behind price increases clearly and convincingly to your teams, particularly your sales and marketing departments. They must understand that these adjustments are essential for sustaining the company’s financial health.
You can draw on historical data to make your case. While core inflation has come down from a recent peak, it remains in line with long-term averages. Borrowing costs have increased substantially, but are in line with long-term average levels. This reflects that today isn’t a “New Normal,” it’s just “Normal,” and waiting for things to pass is not an option.
Implementing Agile Pricing Models
Agility and timing are more crucial than ever when implementing price increases. In times of inflation, you cannot afford the luxury of prolonged analysis and delayed decisions. Instead, adopting agile pricing will allow you to respond swiftly to changing conditions. This means investing in systems and processes that enable more dynamic pricing adjustments.
This does not mean futuristic AI-driven fully dynamic pricing, but if you adjusted prices once a year in the 2010s, preparing to make changes every six months in the 2020s is more dynamic. As CFOs, you can lead the charge in ensuring your organizations invest adequately in the pricing function.
The 2010s realized underinvestment in this area; however, the current economic environment demands a robust and proactive approach to pricing. By building this capability, you’re not just reacting to short-term challenges but also preparing your company for long-term resilience.
Inflation and currency devaluation present significant challenges, but they also offer an opportunity for strategic leadership.
CFOs must embrace the reality that pushing prices is not only necessary but also responsible for maintaining the long-term health of the business. By clearly communicating this strategy to your teams and implementing agile pricing models, you can safeguard your organization’s financial health and ensure sustainable growth. You should leverage your expertise to guide your teams, ensuring that your companies emerge stronger and more resilient.