What does your pricing strategy reveal about your ability to manage risks?
Over the past three years, the world has experienced how volatile global events can be and how local occurrences can escalate into globally relevant issues. Examples of such sudden changes include rapidly rising prices and interest rates, as well as increased general uncertainty reflected in the business climate. It is no surprise then, that nowadays successful companies are good risk managers. A resilient and well-designed pricing strategy can be an important element of that risk management because it allows companies to quickly adapt to changing market conditions.
The World Economic Forum (WEF) describes this new status quo as the era of the "polycrisis", where suddenly arising risks are connected to existing risks and reinforce each other. A risk landscape as dynamic, volatile and interconnected as this creates significant challenges for companies.
Increasing inflation combined with supply chain disruption is a prime example of the interconnection of different risks. Companies rely on consumers, who are increasingly losing purchasing power while at the same time, their products are costing more to produce. This puts companies in a difficult position: facing higher direct and indirect costs in the face of reduced purchasing power. They must either reduce their margins or pass on the increases to their end-consumer, all the while worrying about volumes. Furthermore, they must consider future supply chain uncertainties in many areas, such as highly volatile commodity prices. In short, the current risk environment is very challenging to manage and even well tested hedging strategies may not work.
Pricing strategy and risk management go hand in hand
Successful companies during difficult times must be good risk managers. They understand that there is no reward without risk, no business without uncertainties. They establish clear structures, methods and supporting technology to recognize risks well in advance and derive strategies to manage them. One important and often overlooked element is a resilient and well-designed pricing strategy, allowing companies to quickly adapt to market conditions and maximize revenue despite the many challenges that occur today.
It is often overlooked, how a company approaches pricing and pricing strategy. But this can serve as a precise indicator of how effective overall risk management activities are and how prepared a company is to deal with risk. Addressing the finer points like pricing strategy, is a key indicator that risk management techniques are leading class. Conversely, ignoring elements like pricing are a good indicator that other KPIs and business elements are being ignored as well and therefore unprotected against risks.
Now, more than ever, considering topics like pricing as part of risk management can be a competitive advantage. A focus on pricing and revenue can help organizations systematically identify overall risks well in advance, helping to prioritize them in a structured manner and derive responsive measures.
High quality risk management protects what matters
High quality risk management takes into consideration how objectives are operationalized throughout the organization, from a strategic to an operational level. It further considers that risk management must be adaptable to the context of the various risks. Just as objectives may vary across business functions and organizational levels, different systems must be applied to address different types of risks, such as Compliance Management for compliance risks, Business Continuity for business disruptions or Internal Controls for process related risks.
An integrated risk management approach ensures that all risks are managed directly at their source for more agility. At the same time risks collected across the organization are brought together into one consistent picture so potential interdependencies can be identified.
This way, organizations are able to not only meet compliance requirements, but also gain transparency over the risk landscape and anticipate risks to achieve objectives more reliably.
So, we recommend examining the approach to revenue risk and pricing, for a good indicator of how well risk in general is being managed. If these items are being ignored in the risk management function, it is not too late to address this issue and ultimately, be better prepared for whatever might come next in the age of poly-crisis.