What’s manufacturers’ answer to inflation?

As tariffs and inflation continue their metaphorical stand-off with the economy, a more-literal rise in inputs for manufacturers does not bode well for hopes of preserving profit margins anytime soon.

The costs of goods and materials rose an average of 8% for manufacturers last year, according to a Liberty Street Economics survey from the Federal Reserve Bank of New York. Recent data from the Bureau of Labor Statistics shows prices for US producers rose 0.5% in January, which is more than what Wall Street analysts expected and higher than the December reading.

On top of that, global manufacturing input costs for February rose sharply, according to S&P Global’s purchasing managers’ index, with higher labor costs, supply chain challenges, and US tariffs all contributing.

Manufacturers are feeling added pressure to absorb these costs, and simply passing the cost directly to consumers via price increases isn’t always the way anymore, according to Matt Suggett, a partner at commercial and pricing consultancy firm Simon-Kucher.

“Historically, pricing was more broad-based and anchored to cost changes. What’s happening [now] is precision pricing,” he told CFO Brew.

Suggett said that, even though he doesn’t have a pricing crystal ball, “the future certainly looks volatile and more inflationary than not” for manufacturers. Domestic producers are likely having to make “difficult decisions,” he said, to deal with the cost pressures.

Purposely packaging. One precision pricing strategy that’s become more popular in C-suites across manufacturers, Suggett said, is creative “price-pack architecture.”

“If you think about the Coca-Colas of the world, Oreo cookies, Heinz ketchup, you go into the store, you can buy the same Coca-Cola liquid in a two-liter bottle, in the little mini cans, in a single serving bottle,” Suggett explained. “It’s all the same liquid, but the pack serves a very different purpose and offers a very different value.”

“If you’re a company, you want to think about what your consumers are using these packs for, and how much value is in that pack format for the consumer, and then you really want to set your pricing against that,” he added.

Suggett said this strategy has the potential to compress manufacturing margins for the largest and smallest pack sizes, but gives the company other, more efficiently sized packs with larger margins to make up revenue down the line.

Hopeful planning. Suraj Malladi, an assistant professor of managerial economics and decision sciences at Northwestern’s Kellogg School of Management, found that initially setting prices lower, then bumping them up “gradually over time,” offered the highest profit guarantee, all without knowing demand.

Simply put, hoping for the best, but assuming the worst, Malladi told writer John Pavlus, ensures “only good surprises are possible.”

“For every [pricing] plan, I can ask myself, ‘How bad could it be? For what kind of demand curves would this plan return low profits?’” he explains. “Then I choose the plan where the profits I stand to make even in the worst-case scenario are not so bad.”

The future is now. The advancement of pricing analytics, too, Suggett said, has allowed producers “to identify where to take price increases that bolster your margins, and where to price defensively, to protect volumes and shares.”

“I do think we’re at a pretty clear inflection point,” he told us. “Companies that are able to be more precise…are really going to be able to outperform their peers that are stuck in the old paradigm.”