Building inflation into your business model
The fact that UK inflation has this month passed nine per cent will be no surprise to most people in business, many of whom have been dealing with huge cost increases surging through their supply chains for months.
Nor will it come as a surprise that the forecast is for it to reach at least eleven percent in the coming months, a figure which itself may turn out to be conservative if the upward pressure on wages, from the cost-of-living spike combined with the cross-sector skills shortages, has anything to say about it.
At least, as I’ve heard so many business CEOs say to me over recent months, the fact it is so widely understood means they should be able to get price increases accepted more easily by their buyers.
Which tells me everything I need to know about their strategic approach to pricing, or more accurately, their lack of one.
Prior to their acquisition by Proctor and Gamble, Gillette had one of the simplest and most successful strategies for price inflation that you’ll find anywhere, and it contains a core lesson for everyone.
In 1903, after 8 years of development, Gillette launched its first product, the world’s first “safety razor” with replaceable blades, and twelve years later, in another first, it launched a version marketed specifically at women.
In 1921, just before its patent was due to expire, Gillette launched an entirely new, system version of the razor, at a premium price of $5 while simultaneously slashing the price of its old razor from around $3.50 to just $1, to become an entry level product to the Gillette range.
That model, of a long-term R&D programme, launching a new premium priced trade-up every five to ten years while resetting the prior products to become the new entry level, consistently adding incremental value and performance for ever-increasing price points, served Gillette extraordinarily well for the next eight decades.
It was because of that inflationary business model that Gillette could generate the cash-flow to keep developing the next product generation; to dominate TV advertising from the ‘50s to the ‘90s; and to consistently hold between 70% and 90% of it’s major markets for much of that entire period.
All good things come to an end, and by the time they’d reached six blades, added batteries, multiple lubrication strips, and more swivelling parts than a Charleston, it was clear their ideas pipeline was running on empty. So, with just one more R&D round still in the magazine, the business was sold in 2005.
But it was that R&D-powered inflationary model that was the goose that ultimately laid the $50bn golden egg P&G bought, and that they have been steadily melting down for cash ever since.
It’s hard to find a better example of a strategic approach to price increases, than Gillette’s long game on innovation.
So, how does this help businesses right now, whose margins are being acutely squeezed from both ends, and who are desperately looking to claw back some headroom in the next few months?
The answer is that it doesn’t. But it would have. And it will do when this situation comes around again. Which it will.
The best time to plant a tree was twenty years ago, and the best time to start building that model was probably three of four years back. But the second-best time is right now.
So, the question it answers instead, is this one: Do you want this to be the last time you find yourself in this position?
Because if so, now is the time to start thinking about how you could transition to that long game, and start building an inflationary pipeline into the core of your business model.
As always, give me a call if you’d like to talk about how you could go about it.