This article was contributed by Lisa Thompson and Jim Evans, Axiom Consulting Partners

We assumed that skyrocketing prices were put to rest decades ago alongside disco fashion and feathered hair. But 2021 saw the U.S. Consumer Price Index climb to 7%. It is an unpleasant reality that inflation is back and shows no signs of abating any time soon.

Continued inflation poses particular risks for business-to-business (B2B) enterprise software developers. Why? Because leaders in high-margin businesses like software are often not as sensitive to margin reductions as those in industries with lower margins. For example, a software business that sees 75% margins fall to 72% will not feel the same impact as a company that drops from 20% to 17%. This is especially true for the increasing number of companies that sell both industrial products and software and it makes understanding costs in today’s environment even more critical.

Many software companies operate in ways that obscure creeping cost increases and reduced margins, in part because they rarely track profits and losses (P&L) at the customer level. For example, consider how these businesses typically approach:

    Inflation is increasing the need for software companies to understand their costs to make sound pricing decisions that will help them protect their margins now and moving forward. While costs are only one input among many that factor into pricing decisions, they are obviously a very important component. To uncover areas of opportunity, software developers should: 

      Even in the face of this unprecedented inflation, increasing prices is easier to talk about than to do. Setting profitable prices in enterprise software requires understanding your economic worth to customers, arming salespeople with give-get tradeoffs acknowledging competitors’ strategies and strengths and weaknesses. But make no mistake, understanding how costs are changing and whether, where and how to raise them starts with knowing what your costs are. 

      Lisa Thompson and Jim Evans are partners at Axiom Consulting



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