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Supply chain

Agile pricing will help firms profit from supply chain constraints 

Published 14 April 2022 in Supply chain • 5 min read

An inability to change prices on a more frequent cadence is proving to be the source of a huge missed opportunity when supply is limited, particularly for automakers.  

 

Supply chain constraints are driving companies across sectors to push through steep price increases as demand exceeds supply, contributing to soaring inflation. Yet even businesses that have boosted their earnings in the past year are leaving money on the table, with a poor pricing strategy proving to be the source of missed opportunity.   

Smart organizations are developing a better understanding of where they are placed in the market, and how quickly they can change prices in response to supply and demand dynamics. The automotive industry provides a real-world example of this strategy and the underlying problem in pricing strategies.  

Despite sales of vehicles decreasing due to the lack of microchips, global carmakers banked much higher annual profits last year, as they implemented substantial price hikes and prioritized the production of more expensive, higher-end models to cope with the semiconductor crisis.  

The shortage of semiconductors, which are used in everything from infotainment to driver assistance systems, forced companies to cut vehicle production and shut factories around the world. The shortage is caused by a backlog of orders due to the COVID-19 pandemic as chip makers have given priority to more lucrative suppliers such as technology companies.  

Carmakers have, however, coped quite well with these challenges, because they raised prices and gave priority to manufacturing higher-margin models to keep profits up, instead of chasing volume.  

BMW
Sales are down but profits are up as car manufacturers focus on selling high-end models.

 

General Motors, Ford and Volkswagen sold 20% fewer cars in 2021 than in 2019, yet they posted profits that were 48% higher, according to an IMD analysis. In December 2021, the average price of a new car set a fresh record and topped $47,000 in the US, up 14% on 2020, according to automotive research company Kelley Blue Book.  

But carmakers may have left billions of dollars on the table, with a poor pricing strategy largely to blame. There are many other sectors from machinery to fast-moving consumer goods where supply chain executives believe that their companies have missed out on substantial profits because of their inability to change prices according to supply constraints. 

The clearest indication is that car dealers are charging excessive fees, above the recommended retail price set by manufacturers. In January 2022, customers paid above the sticker price in 82% of new vehicle purchases, compared with about 3% in January 2021 and 0.3% in 2020, according to Edmunds, a car shopping analyst.  

On average, customers paid $728 above the asking price in January 2022. This means dealers are reaping more of the spoils from the car shortage, leaving automakers out of pocket. To be sure, Ford and GM have both publicly called for their dealers to stop charging excessive mark-ups. 

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