Mastering Pricing Strategies in Inflationary Times: Insights from Expert Greg Crabtree

In today’s economic climate, marked by persistent inflation and shifting market dynamics, business leaders are compelled to rethink their pricing strategies to sustain profitability and competitive edge. With insights from financial expert Greg Crabtree, this blog post delves into effective pricing tactics that can help businesses navigate these turbulent times. We will explore dynamic pricing adjustments, identify common pricing pitfalls, and offer tailored recommendations for various industries to ensure business growth and long-term viability.

By aligning pricing strategies with the current economic landscape—characterized by labor shortages and supply chain disruptions—we help you prepare for a future where your business not only survives but thrives.

Understanding the Economic Landscape

In the intricate dance of post-pandemic recovery, businesses are facing a multifaceted challenge: inflation. Far from being a transient issue, inflation has become a persistent companion in today’s economic landscape.

One compelling reason for this persistent inflation is the labor market’s enduring tribulations. Since the late fourth quarter of 2019, the U.S. economy has grappled with a critical labor shortage. This shortage, coupled with wage inflation, forms a formidable driver of the overall inflationary trend.

Crabtree points out that we are in what he calls a “permanent 15% labor inflation cycle,” where rising labor costs subsequently drive up the costs of goods and services.

This inflationary pressure is further exacerbated by the ripple effects of global supply chain disruptions and demographic shifts that limit the available workforce.

Factors Driving Inflation: Supply Chain Disruptions and Labor Costs

Key contributors to persistent inflation include:

• Supply Chain Constraints: Disruptions such as delays, increased tariffs, and shortages in vital components like semiconductors illustrate how interconnected and vulnerable global supply chains are to fluctuations and disturbances.
• Labor Costs: Wage inflation, reduced productivity, and service delays all contribute to overall inflation. Organizations are compelled to reevaluate compensation standards and benefits to attract and retain talent, inadvertently heightening operational costs.
• Supply Vs. Demand: Prices will continue to rise as long as demand exceeds supply and customers have the need and can pay. And it’s very rare that demand is less than the supply. That’s why entrepreneurs can have extremely successful businesses if they find an unmet need in the market.

Understanding these drivers enables businesses to better strategize and anticipate future inflationary trends, thereby aligning their operational and pricing strategies more effectively with the inevitable economic fluctuations.

Strategic Pricing Adjustments to Counter Inflation

In the face of inflation, static pricing strategies can quickly become obsolete. Dynamic pricing, a strategy where prices are adjusted in response to real-time market demands and cost changes, becomes crucial. It allows businesses to remain competitive and profitable despite fluctuating costs. Greg Crabtree advises that this approach should not be reactionary but based on a well-defined framework that takes into account both internal cost structures and external market conditions.

Common Pricing Errors: Biases and Outdated Strategies

Many businesses fall into the trap of maintaining outdated pricing strategies during inflationary periods, which can lead to significant financial setbacks. Common errors include:

• Pricing Biases– These can include an array of things stemming from gut feelings, excuses, misconceptions and misinterpreted data.
• Cost-Plus Pricing Reliance: Solely relying on cost-plus pricing fails to consider consumer demand and competitor prices, potentially leading to pricing oneself out of the market. You have to stay away from just looking at cost when determining pricing. You should always ask what is a customer willing to pay?
• One Price For Everyone– Not every customer is equal. Make sure you have the ability to be quick and convenient so you can get to the high value customers. You can’t leave premium value on the table.
• “Pass Through”Cost Increases– You must find a way to get a contribution margin added to the cost increase.
• Contract Negotiation Errors– Don’t lock yourself into the same price for too long. Long term pricing contracts should include “out” clauses where you can increase prices, pass on the increase in materials, etc. Buyers will try to lock you in but as a seller you need conditional outs and you can’t wait until it’s too late.
• Billing by the Hour– When you bill by the hour you either gave away your expertise or charged for your ignorance. People who bill by the hour are not skilled at scoping. Scoping in pricing refers to the process of defining the breadth and depth of a project or service to accurately determine and communicate its cost. You can’t manage to the outcome if you bill by the hour. Some things have to be hourly but it’s really about defending your value, go do it, and manage to the outcome.
• Ignoring Market Signals: Failure to adjust prices in response to market changes and consumer behavior signals can result in lost revenue and decreased market share. In your pricing strategy you must price in the inefficiencies. You don’t live in a perfect world without disruptions.
• Failing to separate Goods & Services – You might have to unbundle the cost of goods from the cost of services. You don’t have to be shy about calculating the value of your services.
• Emotional Pricing: Decision-making influenced by fear or resistance to change, rather than data-driven insights, can lead to either excessively high or dangerously low pricing.
• Incorrectly Equating Volume Increases with Price Increase: price increases are immediate impacts to the bottom line while volume increase only has margin impact.

By recognizing and avoiding these common pitfalls, businesses can better adapt their pricing strategies to the dynamic nature of an inflation-impacted economy.

Managing Customer Relations

Navigating the choppy waters of price increases demands not only strategic acumen but also adeptness in managing customer relations. Greg Crabtree underscores the importance of open, honest, and empathetic communication with customers when implementing price adjustments.

The essence lies in transparency—providing customers with a clear rationale behind the price hikes. For instance, explaining how rising labor and material costs force a necessary adjustment can help customers understand that the increases are not arbitrary but essential for maintaining service quality and business sustainability. It’s also beneficial to anticipate customer concerns and address them proactively, reinforcing the value they receive despite higher prices. In some cases, segmenting the customer base and tailoring communication for different groups can more effectively convey the message.

Businesses should be prepared to lose some price-sensitive clients and recalibrate their business models accordingly. By focusing on maintaining strong relationships and demonstrating a commitment to fair practices, businesses can foster trust and loyalty even as they navigate the complexities of inflation-driven price adjustments

Adapting Employment Strategies in Changing Markets

The permanent labor shortage isn’t new nor is it going anywhere. Due to early retirements, an aging workforce, fewer international migrations, lack of access to childcare, more entrepreneurial startups, and enhanced unemployment benefits, the U.S. is only seeing a 62.7% labor force participation rate. However, even if every single person in the workforce was employed, there would still be a gap according to the U.S. Chamber of Commerce.

As of July 2024, there were 8.2 million job openings and only 7.2 million unemployed workers. To add to the labor shortage, the US birth rates are downwards trending indicating that future workforces will be even smaller. Inflation and heightened market volatility present unique challenges to employment strategies, as companies grapple with how best to attract and retain the talent essential for their operations.

Strong Company Culture & Benefits

Business leaders must now approach negotiations with an understanding that employees have increased bargaining power, especially in sectors experiencing acute labor shortages. To retain top talent, companies are advised to offer competitive wages aligned with or exceeding industry standards. Besides monetary compensation, focusing on creating an engaging work environment and offering benefits such as flexible work arrangements can be crucial for staff retention. For example, 65% of workers reported that they would prefer a fully remote job position.

When a company’s culture promotes inclusivity, collaboration, and recognition, it creates a sense of belonging and purpose among the workforce. Prospective employees are often drawn to organizations where they can see a clear alignment with their own ideals and where the workplace is not just about achieving business goals, but also about personal growth and community.

Moreover, current employees who feel valued and integral to the company are more likely to remain loyal and motivated, reducing turnover rates. A positive culture enhances job satisfaction, encourages professional development, and ultimately cultivates a dedicated and high-performing team that is essential to the company’s long-term success.

Developing Talent

As the availability of skilled workers becomes increasingly constrained, the ability to swiftly identify, train, and deploy employees for specialized roles enables these companies to maintain operational efficiency and meet market demands more effectively. This agility not only reduces downtime and reliance on an unpredictable external labor pool but also fosters employee loyalty and reduces turnover by providing clear career development pathways.

Moreover, companies that invest in robust talent development programs can more easily adapt to technological advancements and evolving industry standards, ensuring they remain at the forefront of innovation.

Exploring International Labor and Automation as Viable Solutions

To mitigate the impact of labor shortages and reduce operational costs, businesses should consider broadening their talent search internationally where feasible. This approach not only diversifies the workforce but also taps into a global talent pool, potentially easing wage pressures at the local level.

Additionally, integrating automation technologies can streamline operations and reduce dependency on human labor, particularly for repetitive and systematic tasks. By automating certain processes, companies can allocate human resources to more critical functions, enhancing productivity and innovation.

Understanding and implementing these adapted employment strategies can help businesses maintain a robust workforce and navigate the complexities of a dynamic market environment during inflationary periods.

Pass Through Labor Increases Rapidly

As labor costs rise, companies who can adjust their product or service prices accordingly, ensure that increased expenses are covered without severely impacting their profit margins. This financial agility allows them to offer competitive wages and benefits, making them more attractive to potential employees in a tight labor market.

Labor Management Red Flags

In the face of the ongoing labor shortage, it is crucial for companies to remain vigilant for early warning signs that could indicate potential vulnerabilities. Organizations that fail to recognize and address these red flags risk exacerbating their workforce challenges, leading to diminished productivity, increased operational costs, and reduced competitive edge.

• The inability to wait to train lower cost labor
• Long term pricing agreements that do not allow for labor increases higher than consumer price index
• Over-reliance on foreign workers; any government program can’t provide a stable supply of workers
• Over-reliance on wages less than $15 per hour. If you cannot pass through price increases , customers will have to do without.

Practical Business Recommendations Based on Industry

Before diving into specific industry strategies, it’s crucial to recognize that effective pricing during inflation depends on understanding your business’s unique challenges and market dynamics.

 Whether you operate in the service sector, manage a production line, or oversee a manufacturing enterprise, your approach to handling price adjustments can significantly influence your profitability and market competitiveness during inflationary periods.

Service-Based Businesses

For businesses that primarily offer services, personalization and value addition become key:

• Price By The Value of The Result: Avoid billing by the hour. Rather bill on a fixed price by productizing service offerings. Fixed prices allow you to quote quicker and bill and collect up front.
• Match High Value Producers With High Value Tasks: Break tasks into high and low value components and deploy labor accordingly. Use Labor Efficiency Ratio to validate labor productivity as your labor cost increases.
• Reassess Service Packages: Regularly evaluate your service offerings to ensure they meet current client needs and incorporate value that justifies price increases.
• Introduce Tiered Pricing: Create multiple service levels to cater to different customer segments, allowing flexibility and choice, making it easier to adjust specific tiers according to cost changes and demand.
• Unbundle Services & Goods: If there is proven volatility in the goods you add to services, you will need to consider un-bundling pricing. Don’t just pass through cost increases, you have to pass through enough to cover handling of the goods.
• Define Repeatable Processes: Find the successful processes and define what steps need to be included and price according to the right process.

Product-Based Businesses

Retailers and companies selling physical products should focus on:

• Avoid Cost Plus Pricing: As mentioned before, pricing is not about passing through costs. Rather it is an evaluation of what the market will bear in pricing.
• Dynamic Pricing Models: Use data analytics to monitor consumer trends and make pricing adjustments accordingly. This allows you to remain competitive by providing market-responsive prices even during temporary periods of inflation.
• Enhanced Product Bundling: Combine products in unique ways or offer bundles that provide perceived value, making price increases more acceptable to customers.
• Focus on Gross Margin Dollars Over Revenue: Gross margin reflects the actual profitability of a company by accounting for the direct costs of producing goods or services, thereby providing a clearer picture of financial health and operational efficiency.
• Be Clear On What Goes Into Margin: Include any cost that everyone in the market is having to pay. Exclude costs that you paid for bad decisions that others did not pay.
• Price Can Vary By Channel & By Customer Support: The associated costs, target audiences, and competitive landscapes often differ, necessitating distinct pricing strategies to optimize profitability and market penetration
• Avoid Selling Old Inventory Through Regular Channel: When you try to sell old or slow moving inventory through your regular channel, you are using customer’s full margin dollars to get inventory cash back.

Manufacturers

Manufacturers face their own set of challenges, primarily around cost management and production efficiency:

• Price to Market– Once again pricing should be based on what a customer will pay not on cost
• Price in Material Increases: Raw materials will likely continue to be volatile. Price in material increases even if you are working from lower cost inventory on hand
• Understand Customer Profiles: Different customer profiles have different value to your business. Customers who are price sensitive may need to be sent elsewhere. Limited key items should be saved for the best/most valuable customers.
• Avoid Long Term Pricing Agreements: Only commit to as far as you can see. Your contractual trigger points in agreement that either terminate agreement or allow you to charge more.
• Lean Manufacturing: Adopt lean manufacturing principles to reduce waste and lower production costs, which can help stabilize prices.
• Supplier Relationships: Forge strong relationships with suppliers to negotiate better terms and ensure a steady supply, minimizing the need for frequent price adjustments.

Thrive Despite Inflation Challenges

As we navigate these inflationary times, adapting your pricing strategies is not just a necessity but a strategic imperative to ensure your business remains competitive and profitable. Greg Crabtree’s insights offer a clear pathway to understanding and implementing dynamic pricing adjustments that are critical in today’s economic environment.

By leveraging his deep expertise, as outlined through practical strategies and real-world applications in this post, you can avoid common pitfalls and steer your business towards sustainable growth.

Embrace the opportunity to transform your business approach by engaging with Greg Crabtree’s revolutionary keynotes, participating in his workshops, or diving into his comprehensive books. Each of these resources is designed to provide you with the knowledge and tools needed to master the financial challenges posed by inflation.

Take action today to secure a prosperous future for your business. Let’s not just survive these challenging times—let’s thrive!