How to navigate pricing during disinflationary times

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Much of the world has experienced high inflation over the past few years, driven by labor shortages, supply chain disruptions, and volatility in input costs. As a result, pricing and margin management has been high on the CEO agenda, frequently highlighted as a priority in investor communications.

In response, companies have taken several approaches to pricing management, with varying degrees of success. Some have adopted an “inflation plus” approach, increasing prices in a wholesale manner above expected inflation rates to maintain or expand margins. Others have pulled an assortment of levers, making adjustments in discounting, manufacturing, or supply chain management. Many of these companies have continued to grow profitably during these uncertain times. However, in our observations, most companies are squeezed, operating at lower margins today compared with a couple of years ago.

Now with inflation easing, business leaders may be tempted to breathe a sigh of relief. But complacency would be a mistake. For the foreseeable future, a return to the stable dynamics that prevailed before the COVID-19 pandemic seems unlikely. Inflation could remain volatile, and the prepandemic practice of updating prices once or twice a year—with little variation across products, segments, and countries—will no longer do.

How, then, should businesses think about strengthening pricing capabilities during disinflationary times? Vigilance is more important now than ever. In this article, we’ll examine how the market dynamics of recent years have played out for consumer and B2B companies, how the unpredictability of inflation has upended margin management, and how businesses should think about pricing going forward.

Economic winds are still shifting

Despite indications that we are headed for a soft landing, the macroeconomic picture is still fluid, and companies would do well to prepare for a range of scenarios. After a couple of years of soaring inflation, much of the world has shifted in recent months to a period of disinflation and soft demand growth. But compared with previous decades, inflation may remain relatively high for longer. Central banks have given indications that they will hold interest rates steady or make cuts very slowly, even while inflation is heading down. Meanwhile, wages may increase in hot labor markets, input costs continue to swing, and persistent global geopolitical instability remains a threat to economic growth. Moreover, businesses continue to face pressure from shareholders to rebound from the margin squeezes they experienced during peak inflation, and to show growth in a soft market.

Furthermore, different regions have different economic outlooks, which means companies must undertake nuanced margin management strategies that reflect local dynamics (Exhibit 1). The current US economy is resilient, with strong consumer spending, tight labor markets, and slowing inflation. Growth in Europe, by contrast, is more stagnant, with manufacturing activity contracting, particularly in Germany. In Asia, China’s economy continues to slow down and is on the brink of deflation, with a troubled construction sector affecting the broader economy.

Producers and consumers experience pricing and inflation differently across regions.

Additionally, consumer and B2B companies may want to adopt different approaches to pricing management in response to different inflation patterns. Across all geographies, changes in the consumer price index (CPI), which holds more relevance for consumer packaged goods (CPG) companies, typically lag behind the producer price index (PPI). The latter is more relevant to B2B transactions, as it measures the average change over time in the selling prices received by producers. Over the past few years, as well as in future projections, both the CPI and PPI trends indicate volatile and unpredictable pricing dynamics that will require adaptable pricing strategies.

The challenge of delivering on margin management expectations

Diving in a bit deeper, our research shows that the recent inflation cycle has redistributed profits across many consumer companies (Exhibit 2). We analyzed 29 of the largest global consumer companies in key product categories, evaluating their price increases, growth in cost of goods sold (COGS), and the differences in gross margins from 2021 to 2022. We found that input prices increased to peak levels in 2022, squeezing margins among food and beauty CPG companies. Price increases covering 70 to 180 percent of COGS increases were not enough for these companies to maintain gross margins. In fact, the companies we analyzed experienced a decline of 100 to 300 basis points in gross margins in most product categories.

Despite raising prices, consumer companies experienced gross margin loss during times of high inflation.

It hasn’t been all bad news, though. For consumer companies, there have been some positive signs at the ends of the value chain during this inflationary period. For example, consider the value chain for the top 150 global public food companies (Exhibit 3). Top agriculture players and food retailers were able to expand their gross margins by 90 to 100 basis points from 2019 to 2022. In contrast, margins of top CPG players and food distributors in the middle of the value chain have been squeezed or have remained flat.

During periods of high inflation, consumer companies in the middle of the food value chain were squeezed more than those at the ends.

This scenario has played out similarly with B2B companies. Take, for example, an automotive value chain that starts with basic-materials producers and specialty-chemicals suppliers, followed by two to three tiers of automotive suppliers, and concludes with automotive OEMs. Our analysis of the margin evolution over the past four years of the top 20 players by revenue in each stage reveals that companies situated at either end of the automotive value chain have captured a margin uplift of three to four percentage points at the expense of the three different tiers of suppliers in the middle (Exhibit 4). In short, inflation cycles can disrupt and redistribute value creation across the value chain, making margin recovery especially challenging for those in the middle. They may find it especially hard to push through price increases as inflation rates decline and growth is limited in certain markets, even while input prices remain high.

Players at the ends of the automotive value chain have captured the most value during high inflationary periods.

At the same time, companies continue to face business complexity and pressure to roll back price increases at the very moment when they are looking to recover from recent margin compression. Labor-intensive sectors—such as hospitality and other service-oriented industries—have experienced sticky overhead cost increases in wages in recent years. If the hot job market persists, such costs may continue to rise.

As inflation slows, buyers will become increasingly less willing to accept price increases, even if justified by higher input costs. This can hurt players that have been too slow to react and are now facing an uphill battle to return margin position to levels seen before the inflation spike.

Meanwhile, weak demand and low manufacturing activity—especially in Europe—are hugely challenging for companies grappling with finding the right balance between price and volume. As a result, the large CPG companies that we analyzed have lost 1.5 percent volume in sales compared with two years ago. With B2B companies, we’ve frequently seen knee-jerk responses by sales organizations to lower prices when volumes do not deliver on growth targets—even when sales growth performance is reflective of demand cycles, rather than pricing strategies.

Moves for the next pricing cycle

As uncertainty around inflation, costs, and consumer purchasing power continues, companies should take a proactive stance when evaluating and adjusting their pricing strategies. They can start by focusing on three imperatives.

Act now

With inflation falling, what was once thought of as a transitory period of disruption now looks like a potentially longer-term financial deterioration for many companies. But it’s not too late. Companies that have done little to stem their losses may still find a window to justify price increases due to inflation.

For example, the margins of one food ingredients company were crunched last year. It successfully responded by implementing inflation-plus pricing, which led to an expansion of margins by 100 basis points. Starting this year, it has moved to quarterly price updates (rather than its previous annual pricing adjustments) to keep up with the trend of higher-for-longer inflation.

Segment and differentiate

A broad-based, one-size-fits-all approach—with mass price increases justified by cost increases—was applied broadly during the inflation boom. This will no longer work. Each situation is unique and requires a tailored approach driven by granular customer segmentation. A granular portfolio and channel segmentation, informed by a deep understanding of consumer price sensitivity and perception of value, is a better approach. Many CPG companies are investing heavily in refreshing their understanding of shopper price elasticity and switching behavior, as they look to take much more nuanced price actions going forward.

Such segmentation insights are highly regional, as both business and consumer confidence across countries have their own dynamics. In our experience, B2B companies tend to lag behind those in their B2C peers in analytical capabilities. For companies that experience disinflation in their input costs, now is also the right time to accelerate the shift from cost-plus to value-based pricing.

One large global specialty-chemicals company shifted its approach for a recently launched product from cost-plus to value-in-use pricing. This new product had certain technical properties that improved productivity for customers in the trucking industry by 5 to 10 percent. Truck operators could now unload their trucks faster and run more trips per day over rough terrain with a lower risk of tipping over. By identifying and quantifying the underlying attributes that could increase value, the company was able to capture a higher share of the profit pool in the product’s journey from distributors to end customers, extracting a premium irrespective of fluctuations in input costs.

Manage revenue holistically

Adjusting product prices alone isn’t enough to recover or improve profitability. Companies across sectors can adopt a more integrated approach to revenue growth management (RGM), one that addresses the full suite of pricing, promotion, discounting, mix management, and negotiation levers. In consumer companies, this covers promotion intensity, product assortment, and trade investment mix across categories and channels.

RGM is a more established practice among consumer companies than among those operating in the B2B space, where pricing management is often pursued separately from growth levers. For instance, a B2B pricing manager may push an account manager to renegotiate individual SKUs, while sales operations question the share of wallet at that account. But holistic RGM can enable B2B companies, like their consumer counterparts, to manage gross margin generation in different parts of a portfolio for different customer segments in softer market conditions.

In one case, a B2B IT distribution company ran a test with specific customers to see if volumes in a declining market would recover in return for discounts, a practice more common to consumer companies. It selected 15 large accounts and lowered prices for two months to see if profits would improve for them, while at the same time increasing prices for other accounts. The discounting strategy did not increase volume significantly enough to overcome the value lost by discounting, giving the sales organization confidence and evidence to stick to a higher margin strategy.

The path to success

To manage the next pricing cycle and capture the full potential of these pricing strategies, businesses should focus on three areas of development.

Tech enablement

Managing the complexity, speed, and high levels of differentiation in successful pricing strategies requires sophisticated tech capabilities. The B2C sector—with its inherently larger transaction numbers, more SKUs, and easier-to-measure price elasticity—has taken more advantage of developments in AI than its B2B counterparts. Yet overall, many companies—both consumer and B2B—still use a price-setting and execution process that is surprisingly manual and clearly unsustainable for faster, more frequent, and more granular price adjustments. These companies learned the hard way during the inflation boom that by the time they’d executed one pricing update, they were late on the next required pricing update. Every company should invest in AI capabilities that optimize sales and pricing in tandem, as well as other technological solutions that equip, empower, and manage the performance of sales teams in margin management execution at speed and with precision (see sidebar “How one company used analytics to unlock a better pricing strategy”).

Capability building

In the current environment of disinflation and increasingly frequent supply chain disruptions, commercial leaders will be tested on how well they master the age-old art of passing through cost increases quickly and cost decreases slowly. They will need to change their recent negotiation tactic of driving price increases because of inflation. Telling sales representatives to improve their pricing without equipping them with convincing narratives and negotiation skills is unlikely to be successful. Value-selling skills (that is, sales representatives being able to accurately describe how the company’s product or service drives business success better than alternative solutions) and tactful timing of pricing discussions are critical.

The uncertain outlook further requires companies to make data-driven decisions and to react quickly to cost and demand changes. In many sales organizations, this calls for a mindset and capability shift. Many account managers have not experienced conditions of flat to negative market growth and disinflation. They may intuitively respond with price decreases or increases that don’t keep pace with inflation, eroding profits over time. A data and analytics center to guide sales on their pricing strategies with fact-based insights is critical.

Speed, differentiation, holistic revenue management, and aligning costs with value all require significant cross-functional engagement. In our experience, price setting is managed too often by pricing managers with basic input from procurement. Disinflation pricing in soft conditions, perhaps even more than inflation pricing in a growth market, requires procurement, supply chain, sales, and pricing to work in cross-functional teams to protect and improve margins. This requires clear processes and decision-making platforms that are cross-functional by design.

Finally, understanding upstream supply chain costs and risks will further prevent companies from being caught off guard. Geopolitics, domestic political volatility, and energy supply exposure are among the risks in 2024 that may dramatically shift the cost base. To adjust pricing in a timely way, companies can step up their forecasting and increase their understanding of how upstream disruptions will affect their costs.


With inflation and interest levels still elevated, it’s important to move on from the annual or semiannual pricing updates that were the norm before the inflation boom, especially in B2B. Instead, monthly or quarterly price reviews, with a forward-looking perspective on costs, should become common practice. This requires efficiency and speed, enabled by higher levels of automation. Strong feedback loops between pricing teams and local sales teams can ensure agile adjustments.

Our research also shows that when companies activated more diverse margin management levers, they outperformed their less resilient peers. For example, CPG companies that have activated broad margin management levers across pricing, portfolio, mix, supply chain, media spending, and promotions outperformed their peers on gross and EBITDA margins by up to 50 percent (even if volume declines decreased the CPG’s average gross margins). In B2B, comprehensive margin management often requires a better understanding of hidden costs within the organization (for example, SKUs that have small volumes or use components or materials not used in the rest of the portfolio) and how these extra costs link to additional value that a customer is willing to pay for.

Effective execution requires collaborating with customers and having a willingness to test and learn. Retailers, CPGs, and B2Bs alike should focus on automating performance dashboards that analyze buying behavior and market dynamics in real time. This enables a shorter feedback loop between evaluating and adjusting pricing strategies—for instance, by assessing how shoppers respond to promotions. Finally, they should restructure common practices around trade discounts and allowances to provide a more robust framework for negotiations that focus on more value-generating levers.

Pricing has a disproportionate impact on company performance. Our analysis shows that a 1 percent improvement in price has a 6 percent effect on profitability for a typical S&P 500 company. With quick and bold moves, enhancing pricing capabilities can pay off for businesses now more than ever.

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