Is now the time for CFOs to assess pricing?

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. 

Shock tactics

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.”