September 14, 2016
Organizations in the oil and gas sector are no strangers to market volatility, especially within the last year. Since January of 2016, the price of oil per barrel has crashed to $27 and since recovered to around $50. With such massive fluctuations in such a short amount of time, it becomes a serious challenge to create a tactical strategy that stabilizes margins and retains profit growth.
The market may influence prices, but your corporate leaders are the ultimate decision-makers when it comes to pricing and, more specifically, pricing strategy. But ask yourself: How are you currently executing your plan amidst external changes? Has your situation changed since yesterday? Do predictive analytics and data analyses play a role in your strategy?
In an unpredictable economic landscape, risks-and the consequences of errors-are amplified. Companies must continue building upon existing confidence by compiling and preparing relevant information to leverage at the point of decision. Context is needed at every step of the process for improved decisions over time.
Here are five steps you can take to establish your business as a confident pricing master amidst the volatility.
Embrace the Complexity
Too often, business leaders balk at the first sign of complexity and volatility in the market. Gut reactions-knee-jerk overreactions, even-take control and strategies are created on weak foundations with simplistic views of the marketplace.
This mindset has to disappear.
Like a Formula 1 driver leaning into the curve, you too must lean into the volatility. The fluctuations are inevitable, so the sooner you accept it, the sooner you can be in control.
The first step is collecting data-as much as you can. I know what you’re thinking, “that will only further complicate everything!” True, but also not true. By collecting internal, historical transaction data and external market data, the landscape of pricing options becomes much easier to see. You will be able to digest that data into the information that matters. Patterns emerge and you not only better understand what is best for your business, but what is best for the market.
Look at how you, your customers and your competitors reacted at the last wave of change. You have the results from this swing and know what tactics were used then. It all becomes much simpler when you stop and compartmentalize everything you know.
Stress Test Your Strategy
You have the base level knowledge of where you stand and what you have done before. Now comes the experimental phase of this process. Be critical of your past, present and future.
What happened in the past when you changed prices during a strong or weak market? Why did that fail? Why did it not succeed as much as it should have? Are you currently in control of your prices or are you at the will of your competitors and the market? If you stay on this path, how severely will further fluctuations affect your profitability?
Define the variations you might encounter along the way. If you increase or even just maintain your prices while everyone else is lowering theirs, what will happen? What will your customers think if you lead with price increases?
Competitive intelligence plays an essential role in understanding what else can be done. Is one competitor making moves you didn’t think about that are also working? Maybe the moves are not exactly pricing, but highly connected: capacity additions or perhaps rationalizations. Remember, you are not working in a vacuum and failure is not final. In pricing strategy, the game is a constant give and take. You have to be ever-vigilant and willing to poke holes in your own plans to expect everything.
Stick to the Plan
Allow me to pose a hypothetical situation for this next step. The price per barrel is dropping…quickly. It’s heading towards the $27/barrel mark again. What do you do?
From step one, you know what you did earlier this year when prices were at that level. Let’s say you dropped your prices to salvage margins. Since then, you’ve likely had trouble increasing your prices to catch up. This time around though, you will not decrease prices; you will offer rebates or other short term adjustments that don’t impact the current “price on the table.” Now your prices can remain the same while acknowledging the changing market to your customers. When the market hits another upswing, the short-term “relief” goes away, and you won’t have to increase prices.
Tactics are short-term, but they must support your strategy at all times. You might have to try different paths, but you must focus on the end goal. You know that more changes are coming. Resist the temptation to change your objectives just because the market is moving differently than you predicted. Success is expressed with the “and.” You have to be successful now and in the future to maintain profitable growth.
Customize Your KPIs
Above I mentioned goals and tactics. To reach the goals you must understand which tactics are working and which ones need tweaking. Establish a set of KPIs that are fine-tuned for your business. No one KPI is enough to drive the organization so some have to be short-term while others are long-term.
When working with standard, internal KPIs like margin and revenue, look closer at the details. Segmenting your KPIs by product, customer, region, size, industry, etc. can give you a much clearer view of how your tactics are performing on a granular level.
Internal KPIs are important, but do not ignore external factors. You are no doubt tracking market trends and what your current competitors are doing. What about new competition? New capacities? Understanding how the market players are performing gives insight into your relative success.
Communicate at Every Step
Pricing is not an exclusive finance project by any means. The aforementioned steps should be spearheaded by the finance function, especially the CFO, but this does not exclude sales and marketing and IT from contributing.
Communicate the strategy and tactics to the rest of the organization and how they are tied to your company’s success. In doing so, they can incorporate the objectives into their own strategies while also contributing to the self-critique process.
Specifically, sales is an indispensable source of information for pricing strategies. No one knows your customers better than your sales reps. Be transparent with them and collect their feedback to improve tactics and understand how the market conditions play out on the front lines. Providing the sales reps with relevant contextual information that is useful as they have conversations with their accounts closes the loop-stiffens the spine if you will-setting expectations for those tougher conversations around future price changes. Transparency both ways will instill confidence in your organization’s strategies.
Prepare for the Inevitable Fluctuations
There is no stopping further fluctuations from occurring. The five steps outlined serve as a pseudo-checklist to follow on the path towards combating the volatility of the oil and gas market.
These steps will help protect your company from short-term damage by having sorted the available options prior to the need, so that you are ready to deploy when things occur. By looking internally, continually checking your strategies against the market, and creating a dedicated, corporate-wide commitment to pricing, you can achieve long-term success stabilizing margins and boosting profitability.