Setting Pricing in a Volatile Market

20th January 2023

Since 2020 the supply chain for manufacturers, suppliers and consumers has been unstable, and this has had a detrimental effect on many businesses. It is thought that in 2021 these increasing supply chain issues may have cost US businesses as much as $228 million.

This is a challenge that Veethree have had to overcome in 2022, as with our orders tripling in some cases, it has been essential to find ways for working around the supply chain issues. Through restructuring the way we work and the relationships we have with suppliers we have met all our orders but it has been challenging.

Unfortunately, it doesn’t look like 2023 is going to be any easier in regard to this volatile market, and therefore businesses need to find ways to overcome these issues in order to continue trading.

Supply chain issues

There is no single reason why the supply chain is facing so many challenges, and there are a number of factors which have had an accumulative effect. These multiple sources are why it will be some time before the market will be stabilized. Some of the catalysts are:

  • Global Political Unrest – The war between Russia and Ukraine, the unrest between China and Taiwan, import conflicts between China and the US and fallout from Brexit have exacerbated many of the supply chain issues.
  • Economic Crisis – The international economic crisis has had a knock-on effect across all industries as fuel and energy costs rise, as does the cost of individual components, labor, and interest rates.
  • Covid Induced Shortages – The Covid lockdowns have resulted in a backlog as manufacturers and factories were closed for an extended period of time.
  • Logistics Drivers Shortages – Since before the pandemic there was a global shortage of logistics drivers causing delays to deliveries of components as well as completed units.
  • Labor shortages – An ongoing global labor shortage caused by long term factors which were exacerbated by the Covid measures, has meant it can be difficult for manufacturers to expand in order to meet demand.
  • Change in demands – There is an increase in demand for technological and electrification of products within the growing EV market. This demand is currently ahead of supply and therefore means components may have a long lead time.
  • Long Lead Times – Orders for equipment, components, or hardware sometimes have a lead time of more than a year meaning Just In Time (JIT) production is suffering. At Veethree we have boosted inventory levels from $4.6 million to more than $7.0 million to ensure the parts to complete orders are always available.

All of these challenges can make it difficult for manufacturers to produce their products, retailers to receive the products in time, and continued access to goods by consumers.

For businesses however, a constantly changing and unpredictable market can make setting prices a particular challenge.

Setting pricing

The international economic crisis is one of the biggest challenges to hit businesses since 2020. Last October, core inflation price levels had increased in the US for producers by 6.7%. Although it is stabilizing the rate is still much higher than it was in 2020.

In a stable market, inflation is often set around the 2% mark, meaning when setting pricing this can easily be incorporated into the margin. However, in such a volatile, unpredictable, and unprecedented market it can be difficult to set the pricing for services and products, and if they get it wrong companies can find themselves in financial trouble.

When setting prices, it’s important to not make impulse decisions – whether that is to raise prices or to lower them to beat competitors.

Through careful planning and considered decisions some businesses are able to use such market volatility to their advantage. This can be achieved through identifying ways to maintain and expand margins which can be done through re-evaluating supplier contracts, buying in volume, introducing Just In Time (JIT) production, or removing this if supply is becoming unreliable.

Here at Veethree we now work with multiple and different suppliers in order to get the orders when we need them. In critical component situations we have had to move to dual suppliers to increase the likelihood of receiving what is required when we need them.

By identifying ways of streamlining the business to make it more efficient, there may not be a need to raise prices. Rewriting or producing a new business strategy which will be more flexible during unstable economic times could also be a way of strengthening the business.

In the current situation with the supply chain challenges as well as a major increase in costs for components and transportation, many businesses are having to cover these increases by passing some of this to the client. If this is unavoidable ensure the brand image is strong enough to absorb a price rise without losing clients.

However, raising prices may not always be the right decision and can have a knock-on effect over the whole business.

  • Losing customers – If customers come to you because you are cheaper than the competitors then raising your prices will send them elsewhere.
  • Changing Working Practices – When prices have been raised this can end up changing the marketing message for the product where quality and the solution it provides has to be emphasized more than the function itself.
  • Not temporary – What happens when/if inflation, fuel and energy costs return to normal levels? If you lower your prices, this could then become the norm in the eye of the customer, but if you don’t lower them it could affect your brand as some may see it as profiteering.

So, what can you do to set realistic and sustainable prices in the current environment? There is no easy answer. The key is to understand your business, and where it is at the moment as well as knowing your customers and why they chose your business over the competition.

Here at Veethree we are not immune to the current global challenges, and we set pricing depending on the business market at different times of the year. We also offer a Premium Price Variation (PPV) to react to extremes in price variation which ensures the product remains in production and remains viable without compromising on quality. We always strive to provide high-quality, cost-effective products and services for all our clients.