Explore the intensifying margin pressures facing businesses today and learn strategies to navigate cost challenges in a competitive landscape.
Rising inputs costs and price-sensitive buyers are making some business owners sweat. This combination spells margin squeeze.
One year ago, in our Trends Report™ Executive Summary, we warned our clients of upcoming “profitless prosperity” — where your top line grows, but cost pressures result in margin squeeze that hurts the bottom line. For many businesses, especially those exposed to commodities, margin pressure has already become a reality.
The Return of Margin Pressure
We can visualize margin squeeze by comparing the price changes for intermediate and final goods. Intermediate goods are split into two categories — unprocessed (e.g., petroleum) and processed (e.g., auto parts sold to a car manufacturer). This spread illustrates how much input prices have outstripped the prices final goods producers receive in recent months. Here is how that spread is calculated:
If we visualize the historical trend, it shows us that margin pressure is intensifying and, outside of the post-COVID cycle, it is quite high.
A Familiar and Cyclical Challenge
This chart shows us that:
- We’ve been here before.
- The trend is highly cyclical.
- The margin squeeze from unprocessed goods (raw commodities) is much higher (about 3x as strong) than the squeeze from processed inputs.
While some margin could be recovered, it is important to not get complacent.
Why Margin Challenges May Persist
We expect cost pressure from many sources in the coming years: higher wages from demographic tightness, higher electricity costs as datacenter demand draws on a constrained system, and higher costs stemming from a global trend towards economic nationalism. Those are all on top of a trend of sticky broad-based inflation driven by fiscal and monetary trends. At the same time, buyers are likely to remain price sensitive.
On the consumer side, wages are currently falling slightly behind inflation, eroding purchasing power. This may cause consumers to pull back on discretionary purchases and to trade down to more budget options.
On the B2B side, a number of businesses are also facing margin pressures, so negotiations may come down to who has more bargaining power and how much loyalty you’ve cultivated over time.
Protecting Margins in a Price-Sensitive Market
Competing on price alone is a surefire way to lose margin. Don’t just count on pass-through pricing. You will need to be proactive in addressing both your competitive positioning and your efficiency. Do market research to better identify your target market and recognize what product mix and marketing will be most appealing. You may need to choose between targeting higher-margin lower-volume work or the reverse.
Across the board, companies need to be addressing efficiency. How can you reduce waste and empower your employees to be more productive? When the economy undergoes a recession in the 2030s and volumes drop, investments in efficiency will still be helpful; we expect this period of sticky inflation to last into the early 2030s. Further, consider focusing on sectors like service-related or MRO work that are less product, price, and raw material focused, and instead more focused on quality of service (most service-related and MRO work also has the benefit of being more resilient to downturns).
If you need help navigating margin squeeze and preparing for the 2030s depression, we are here to help.
