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Pricing: Strategic Decision-Making for 2020 with Alex Chausovsky

August 23, 2019

Listen to ITR Director of Speaking Services Alex Chausovsky discuss pricing and how to make the best decisions for your business for 2020.

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ITR Economics Divider

 

Transcript by Rev

Alex Chausovsky:
Hello everyone. Welcome to another episode of TrendsTalk with ITR Economics. My name is Alex Chausovsky. I'm the Director of Speaking Services at ITR. And I also do a lot of consulting with some of our bigger clients and that's what I wanted to talk to you about today.

Many of the companies that we work with on a one on one basis are now getting into the strategic planning season for their 2020 fiscal and calendar years. Many of them are trying to figure out what to expect in this slowing economic environment, what type of growth targets or let's say more reasonable performance targets to set for themselves for the 2020 year. And a lot of the conversations that I've been having, the topic of pricing has come up. Many of the industries that we serve, including construction and manufacturing and consumer products, they're dealing with environments where prices have gone up repeatedly over the 2017 and 2018 timeframe. And it's actually continued somewhat into the first half of 2019. But we are now starting to see some pushback from clients across the spectrum of industries on those higher prices. And it's really not surprising because when you look at what's going on with input costs, those are in a lot of cases down quite substantially across the board.

So just to give you a couple of examples, steel over the last three months compared to the same three months from last year, that's down 7.9%. Copper is down 9% on a quarter over quarter basis according to the latest data point. Zinc down 11.4% and aluminum down 18.7%, again over the last three months compared to the same three months from last year. So when you talk about commodities, when you talk about basic inputs, many times we're seeing some significant price declines on a year over year basis. Customers are aware of this. They know that input prices are declining and as a result they're likely to start looking for some additional concessions from suppliers.

You can also see this data manifest itself when you look at the price indices. So the one that gets talked about the most is the US Consumer Price Index. That is up 1.8% on a 1, 12 rate of change basis, which means the latest month of data, which in this case would be July compared to July of 2018. When you look at the Producer Price Index, basically the way that costs are measured for manufacturing companies and for producers in general, that's up just 0.8% as of July. And when you look at that compared to July of last year, it's a fundamentally different environment because at that point in time prices were actually up 4.3% and so companies have been able to leverage this upward cost pressure that they've been feeling themselves to pass along some of those price increases to their customers. And we've seen in some cases record high prices in multiple sectors.

As you plan for next year, understand that this will put some additional downward pressure on your revenue performance over the course of the next 12 to 18 months. As these prices continue to be in negative territory for many of the commodity markets, you will start to see customers asking for concessions from you in terms of price and beyond the normal kind of back business cycle market fundamentals, which means that your revenue growth will first slow and then could potentially go into contraction in 2020 in and of itself, you will have this additional factor to consider of downside pressure on prices also negatively impacting your performance over the course of the next 12 to 18 months.

So as you plan for 2020, understand you're not only operating in a slowing macroeconomic environment, you're going to have to contend with pricing pressures on top of that. If you'd like to get some specific advice for how you can deal with these, certainly feel free to reach out to us, but at a minimum, please be aware of the impact this will have both on your top line and on your bottom line over the course of the next 12 to 18 months.

Thank you guys very much for your time today. This has been the latest edition of TrendsTalk with ITR Economics, and I look forward to talking to you again next time. Take care.

 

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Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.