The focus has largely moved on from the economic consequences of the COVID-19 crisis, with inflation rates firmly in the spotlight at the moment. In May, annual inflation in the euro zone reached 2 percent, up from 1.6 percent in April. This is the highest rate since October 2018. In America, it is higher still: the country’s consumer-price index rose to 5 percent year-on-year in May, reaching levels not seen since 2008.
Companies experience more price pressure and struggle with countermeasures
The rise in inflation was a widely predicted trend for 2021, building from the volatility of the previous year. This was reflected in the responses to our recent Simon-Kucher Global Pricing Study. Almost 60 percent of the 2,200 responding companies (covering over 27 countries and 36 industries) experienced higher price pressure in the last 12 months. Most attribute this pressure to external factors such as low-price competition and stronger customer negotiation power.
The study also revealed a lack of ambition and prioritization when it comes to price. Only 20 percent of companies identified pricing as a key priority for 2021, even with the predicted rises in inflation. Additionally, whilst over 80 percent of companies reported planning price increases for 2021, many struggle with realization. Last year, for instance, only 15 percent of companies surveyed realized 80 percent or more of their planned price increase. On average, companies achieved only one third of the price increase they were seeking. Factoring in that the majority planned for inflation-level increases at best, this leaves many companies in the danger zone.
So how can companies prepare for price inflation and improve their price increase capabilities?
9 steps to increase prices and offset price inflation
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 an answer, we recently developed a framework that outlines three key phases with nine essential steps for companies to create a workable price increase process:
Configure price levels …
1. High-level targets: Consider and communicate relevant revenues only!
2. Product-specific targets: Determine higher increase potential for value-added products and services.
3. Customer-specific targets: Differentiate customers/customer segments and channels according to “ease of increase.”
… get prepared …
4. Guidelines: Define clear escalation rules in case of derogations from targets.
5. Sales incentives: Reward successful salespeople for their price increases!
6. Communication: Communicate price increases (including reasoning) externally and internally.
… and roll-out the initiative!
7. Supporting material plus training: Provide battle-cards, argumentation guidelines, and negotiation trainings.
8. Monitoring: Make sure there is always full internal transparency on the status of price increases.
9. Steer/counter-steer behavior: React immediately and adequately if you observer deviations from targets.
By following these nine steps, companies can ensure higher realization rates for future price increases and prepare themselves most effectively for dealing with continuing price inflation volatility.