Supply chain disruptions, rising energy costs, and increased consumer demand are driving inflation rates up to levels not seen in decades. However, even after months of increases, many companies are struggling to respond effectively to the situation.
Consumer and energy prices continue to surge, keeping the inflation rate around the globe at a historic high. As the Organisation for Economic Co-operation and Development (OECD) reported on April 5th 2022, year-on-year inflation in the OECD area rose to 7.7 percent in February 2022, the highest they’ve been since December 1990. In comparison, reported rates were 7.2 percent in January 2022, and just 1.7 percent in February 2021. These numbers are expected to worsen, especially given the ongoing conflict in Ukraine and increased global volatility. Amid the uncertainty, the OECD estimates global economic growth will be more than 1 percentage point lower this year because of the conflict. Inflation, already high at the start of the year, could rise by a further 2.5 percentage points on aggregate across the world.
Study shows lack of strategic countermeasures
This is bad news for consumers and companies alike, who are all struggling with the situation. To find out more about the specific expectations and viewpoints of the latter, we surveyed more than 3,000 companies from across 20 countries in the Simon-Kucher Inflation Pricing Study.
What were the key results? Many companies are aware of the gravity of the situation. Roughly a third expect a cost increase of more than 6 percent at or above today’s inflation level. And while the majority of decision-makers sees price increases as the most important measure to counter the cost increases caused by inflation, one-third of all companies surveyed have neither implemented nor planned price increases and would therefore remain stuck with the costs.
The reason for that is the fear of excessive high-volume losses due to price increases – almost 70 percent admit to that. What they’re not realizing is, if they conduct their price increases with a clear objective and a differentiated approach, risks like these can be minimized. However, since roughly 30 percent of companies carry out price increases evenly (“the peanut butter spread approach”) across all customers and do not differentiate, there is still enormous potential for improvement.
9 steps to increase prices and offset price inflation
So how can companies prepare for price inflation, and improve their price increase capabilities? Given the typically low inflation levels over recent years, many companies stepped back from consistent investment in pricing excellence. This has come back to haunt them now, as an inefficient price increase process risks causing significant margin erosion. But how can companies increase their prices to offset inflation without breaking contracts, “waking the sleepers,” increasing churn, or damaging their reputation?
As pricing experts, we developed a nine-step approach for companies to create a workable price increase process:
CONFIGURE THE LEVELS
- Contract inventory: Review existing contracts and identify touchable revenue; establish a point of time and respective frequency for increases (per product and contract).
- Campaign target: Analyze given data on cost development and price potential, consider relevant revenues only and align target with C-level.
- Customer/product specific targets: Differentiate customer (segments), products, and channels mainly based on “ease of increase” (and less current profitability).
- Alternatives and escalation rules: Develop alternatives (price models, price clauses, less expensive alternative) to increase and define clear approval rules in case of derogations from the target.
- Sales incentives: Reward successful price increases (on top of the existing comp plan).
- Communication and trainings: Have C-level explain ambitions internally and externally; develop sales guidelines and train price negotiation-related skills (including mock negotiations).
ROLL OUT INITIATIVE
- Supporting material: Prepare battle cards, argumentation guidelines, concessions, and negotiation plans account by account (and/or product by product).
- KPIs and roadmap: Develop relevant KPIs (including roadmap/timing for negotiations) to enable meaningful monitoring.
- Monitoring: Establish real-time monitoring of implementation progress (both process and result compliance) and react accordingly in case of deviations.