Responding to Currency Depreciation: How CFOs Drive Price Adjustments to Maintain Real Purchasing Power

Despite recent signs of easing, inflation persists. The reality is that prices are not simply rising; rather, our currency is depreciating. This distinction is crucial. As a financial leader, you have the responsibility to navigate these complexities and guide your organization through the cycle.

First, we must recognize that when price increases stem from inflation rather than value creation, what is truly happening is a decline in the purchasing power of money. This phenomenon, often called currency depreciation, has profound implications for corporate strategy.

As the value of money declines, the nominal value of goods and services appears to rise. If not managed properly, this can lead to dangerous complacency. For example, the nominal value of assets or revenue may appear to grow, but the real value may stagnate or even decline.

This "money illusion" can weaken a company's ability to invest in equipment, compensation, and R&D. As CFO, your role is to protect the organization from this risk by ensuring that monetization strategies account for currency depreciation.

Driving Real Purchasing Power

The 2020s are vastly different from the 2010s. In the previous decade, the CFO's task was typically to expand gross margins by keeping prices stable and cutting costs, with cost reductions needing to exceed the average inflation rate of about 1.8%. This strategy allowed companies to achieve margin expansion without significant price increases.

Today, with inflation still higher than in the previous decade, the same strategy is no longer sustainable. First, achieving cost reductions of 4% or more in the current environment is extremely difficult. The suppliers and partners you rely on are facing the same inflationary pressures, making negotiating cost cuts challenging. Second, internal teams responsible for cost management are facing rising costs beyond raw materials, including labor, energy, and security. Therefore, relying solely on cost reduction as a long-term solution is no longer viable.

Consequently, growth—whether in revenue or profit—requires price adjustments. This brings up a key point: not all businesses have the right to raise prices. Price adjustments should reflect the value of the product or service. In any market, there are products whose value is rising, stagnating, or falling.

If your product's value is stable or rising—which applies to the vast majority of companies—you need to at least drive nominal price improvements. This will generate nominal dollar growth, maintaining your real purchasing power as CFO and ensuring the health and long-term survival of the business. If your value is expanding, you must push for real price increases that go beyond nominal levels.

Getting Your Team on Board

One of the most critical parts of this strategy is communication. As CFO, you need to clearly and persuasively articulate the rationale behind price increases to your team, especially sales and marketing. They must understand that these adjustments are essential to maintaining the company's financial health.

You can use historical data to support your case. Although core inflation has eased from recent peaks, it remains consistent with long-term averages. Borrowing costs have risen significantly but are also in line with long-term averages. This indicates that today is not a "new normal" but rather the "normal," and waiting for the problem to resolve itself is not an option.

Implementing Agile Pricing Models

When implementing price increases, agility and timing are more critical than ever. In times of inflation, you cannot afford prolonged analysis and delayed decisions. Instead, adopting agile pricing will enable you to respond quickly to changing circumstances. This means investing in systems and processes that support more dynamic pricing adjustments.

This does not mean futuristic, AI-driven, fully dynamic pricing, but if you adjusted prices once a year in the 2010s, being prepared to adjust them every six months in the 2020s is more dynamic. As CFO, you can lead the organization in investing adequately in the pricing function.

The 2010s saw underinvestment in this area; however, the current economic environment demands a robust and proactive approach to pricing. By building this capability, you are not only addressing short-term challenges but also preparing the company for long-term resilience.