McKinsey: How to manage margins through volatile times

Jessica Moulton, Senior Partner at McKinsey & Company
As vulnerable companies struggle to return to pre-pandemic margins, experts from McKinsey explain how to build resilience and protect customer loyalty

While business leaders might be tempted to declare victory over price volatility given recent data, slowing growth – especially at a time of geopolitical uncertainty – threatens margins just as much as spiralling input costs.

Many companies are still struggling to return to pre-pandemic margins and remain vulnerable to the next shock, whatever it may be.

Despite these economic headwinds, some are pushing forward with an integrated margin management approach and exhibiting boldness with their pricing and promotions. 

“These winners are adopting digitally-empowered approaches to procurement, drawing up new sets of trade terms and supplier models, led by operations teams working in close partnership with the C-suite,” explains Jessica Moulton, Senior Partner at McKinsey & Company.

“Transformations that would once have taken five years are being completed in less than 12 months. This velocity is enabled by the increased uptake of digital and analytics tools, which inform better, faster procurement decisions, and provide increased transparency.”

One piece of advice offered up by a CEO during a recent McKinsey survey on leadership and inflation response was particularly pertinent: companies should “act early to lower costs and protect the balance sheet so that they are stronger and leaner when the economy begins to improve”. 

In other words, it seems the time to transform margin management is now. 

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How can analytics benefit pricing?

Developing a new approach to pricing can have a significant impact on organisational growth.

So, before making important decisions in this area, one crucial thing to consider is data analysis and ensuring leaders have access to reliable information. Those organisations which understand their consumer and supply base will find themselves in a stronger position when crafting an effective pricing strategy. 

“Outperforming organisations use data insights to identify ways to make pricing communication more customer centric,” adds Emily Reasor, McKinsey’s Global Pricing Leader. “Those that deploy more sophisticated product costing, pricing, promotions and spend analytics gain increased transparency, which informs better and faster decisions.”

Clearly, by having data that can easily be compared, executives can evaluate category or cross-division programmes with greater confidence, helping to simplify communication and make discounting more transparent. 

“Dynamic pricing is the next step in this analytics journey,” Reasor continues. “This leverages competing inputs like availability, innovation, line pricing, elasticity and market activity to recommend precise price movements at varying levels of frequency. 

“When fed the appropriate data, algorithms can automatically recommend price changes for selected products, adding a new layer of agility to pricing.”

Emily Reasor, Global Pricing Leader at McKinsey & Company

By harnessing the power of data and analytics, businesses can maintain margins at sustainable levels, while being mindful of pressures on consumers and their heightened sensitivity to price. 

Less experienced companies will likely face a significant task when shifting to data-powered customer-centricity, but their CEOs will be better equipped to mitigate the effects of volatility. 

Making the big decisions on pricing

Innovative leaders have many choices at their disposal when it comes to selecting a pricing model. 

They may use data to ensure pricing and procurement are brought closer together, or choose to import pricing models from other industries. 

An effective pricing decision cannot be made in a vacuum, emphasis Moulton, and depends on understanding a host of factors, including: the changing needs of customers; the activities of competitors; and risks within procurement and the product supply chain.

“Pricing teams who understand the issues key suppliers are facing will be in a better position to build a more accurate and responsive strategy,” Moulton goes on. 

“The data collected by pricing and procurement teams is most useful when shared with other teams, who can add their own knowledge to the conversation and help create a more holistic approach to pricing – one that acknowledges both business and customer perspectives.”

Breaking down silos

Silos hamper the effectiveness of analytics, and companies with successfully-integrated pricing and procurement functions typically ensure that data is shared across all departments. 

One approach to breaking down silos, according to McKinsey, is to set up a “dynamic margin cockpit” that can synthesise internal and market data to deliver real-time insights on inventory, customer demand, market pricing, supply disruptions and other critical information. 

Moulton says there are two further operational steps leaders can take to build resilience, stabilise margins and protect customer loyalty. 

“The first involves the formation of a “volatility council”, tasked with developing a cross-departmental approach to the challenge,” she adds. “This group can take action to protect margins, identify risks, monitor markets and respond to customer feedback. Some organisations’ volatility councils report daily to the CEO, helping to provide the capacity to rapidly staff projects or help with supplier negotiations.

“Additionally, a procurement ‘resilience team’ can provide real-time insights on customer demand, inventory, market pricing and supply chain disruptions. Working with the volatility council, the two groups can play a pivotal role in meeting customer expectations, securing growth, and modernising the wider organisation.”

Moreover, collaboration between portfolio and product design is also key, allowing businesses to deliver offerings which use the materials available during times of supply chain disruption. When dependencies are minimised and businesses have ready access to alternative supply sources, fragility and risk can be reduced. 

"Uncertainty and volatility pose significant pricing challenges for all businesses,” concludes Moulton. “Leaders that adopt analytics, drive innovation and foster cross-departmental collaboration by taking a holistic approach to margin management – that doesn’t overlook consumer concerns – will position their companies to succeed through this period and emerge more resilient.”

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