Is now the time for CFOs to assess pricing?
Pricing has become a top concern for finance chiefs. It will take some finesse to strike the right balance
For Alistair Hughes, managing director and co-owner of Savoir Beds, the price of birch plywood has become a hot topic.
From June to September 2021, he watched the price of this material – used to make headboards in the firm’s luxury beds – rise from £54.70 a sheet to £98.50, as the post-lockdown economic boom fed a spike in prices. Now geopolitical tensions are adding to the inflation, with much of the world’s wood sourced from Russia.
Hughes decided to make a bulk order of plywood to protect his margins from any further hikes. Originally quoted the £98.50 figure by his usual supplier, he was then told he could be looking at a further 40% rise. “They’re thinking the price will be at least £137 a sheet. But we don’t have a price, which is a pretty crazy situation.” Fortunately, Hughes decided to up his prices by 10% at his annual pricing review last October.
For Savoir Beds, raising prices came with the knowledge that it might hit sales volumes. But there are limited alternatives: Hughes can’t switch the hardwood birch for softwood plywood in his headboards any more than he can compromise on the materials for his handmade box-sprung mattresses. As a quality manufacturer, that’s not a luxury he can afford.
Value of expertise
The dilemmas facing Savoir Beds will be familiar to companies across the country, as CFOs and financial leaders confront the reality of rising costs of inputs and squeezed margins. Do you swallow the cost rises or raise your own prices? If the latter, do you pass on some or all of the additional costs to your customer? Or do you substitute things in your service or product for cheaper alternatives?
CFOs find themselves in the middle of a major conversation, in which price variation is a key topic. “The dialogue between finance, supply chain, marketing and sales is enormously important,” says Michael Haupt, a partner at Deloitte Consulting and author of The Contemporary CFO.
Many CFOs will be looking at securing prices now, as well as examining all aspects of working capital management, and what – if any – adjustments can be made to their supply chain. CFOs will also need to make calls on which of their firm’s customers or suppliers are potential credit risks.
Most importantly, CFOs must recognise that navigating their business through this period of uncertainty is their responsibility. “The times where CFOs were only looking at the financials are long gone,” says Haupt. “In most companies, CFOs are not only the second strongest in the company, but a key decision-maker. One of the key roles that we see emerging is not just taking enterprise-wide responsibility, but almost being the glue of the company – an integrator, change agent in these times.”
By virtue of their role, CFOs have “a very strong network in all parts of the business … it’s almost the only function that could quickly coordinate the response,” says Haupt. Then there’s the subject of data. “Things like the analytics – how you run that pricing model, how do you do things like scenario planning or analytical forecasting. You would expect end-to-end integration, so understanding if I change my prices what’s going to happen to my inventory.”
This is something only the CFO can deliver – but then he or she needs to communicate it, taking “customers and stakeholders and investors along with you”, says Haupt.
Sir Andrew Likierman is professor of management practice in accounting at the London Business School and a former CFO and government finance chief. He thinks good CFOs need to be able to look at what’s going on and make a clearsighted assessment of the landscape.
“Where your CFOs really earn their stripes is by being able to differentiate between what’s going on now from the other shocks we’ve had,” he says, pointing to the impact of Covid, Brexit and the global financial crisis. Good CFOs will ask what is happening and why it is different from previous shocks, he says.
This approach will help inform the response: for example, whether it’s time to increase the price of a product or reduce it in size, hoping consumers don’t howl in protest.
“What differentiates a quality CFO from somebody who simply does the numbers is that they can take part in this discussion as part of the team,” says Likierman. Simply producing data isn’t enough, he says. It’s important to understand how the people making the decisions need to look at the numbers. “The CFO is going to need to put those numbers into some kind of context. It’s going to move from data to information.”
But it’s more than being a good communicator: the CFO must have a strategic eye on the business, says Likierman. “It is definitely not the bookkeeper. It’s definitely just not somebody who hammers out the numbers and sits back and waits for somebody else to make a decision.”
So what are CFOs to do? Ultimately, it’s down to the necessities of their company, the market they operate in and the view they take of the current inflationary period: is it permanent or will things settle back down? If so, when? Haupt’s view is that no one really knows, “so the best strategy you can have is being prepared for various scenarios.”
At Savoir, Hughes has all but made his bed. He won’t be waiting till the next annual pricing review in October to make a move. He’s looking at potentially another 10% rise as early as June, though this is not yet definite.
“If it’s less than 5% required I wouldn’t do it. We can manage it. But as it creeps above that then it becomes non-manageable, because your net margins aren’t so high. There’s one thing making a bit less money, there’s another losing money.”