Companies have hiked their prices due to the pressure to achieve higher returns, manage new corporate tax introductions and keep up with inflation. From oil prices rising by 44% to Oreos increasing 7.5% over the past six months, this price increase trend is evident across the board.
Additionally, multiple notable price increases have been announced recently by CEOs of logistics companies (DHL), consumer products (Mondelez, Kraft Heinz), luxury retailers (Ralph Lauren), as well as telecom companies (Airtel).
C-level executives need to understand—and preferably, get ahead of—the trends that will likely drive their companies’ success in the future as they recover from the impact of Covid-19 over the past two years. Questions need to be asked in order to benchmark potential purchasing decisions. The three main ones are:
• Should we even make price increases?
• Are the proposed figures high enough from a business perspective?
• How can we arrive at such increased amounts?
By understanding pricing power, companies can determine whether they can raise prices without suffering a decline in volume. We see quite a few success factors that contribute to high pricing power:
Strong Brand Value
Consumers may become loyal to a brand when they see value in it, and this can discourage other companies from entering the market, protecting the brand’s own market share. In the words of Ralph Lauren’s CEO, who expects 17% price increases, “you’re bringing in a younger, higher value, and less price-sensitive consumer who can absorb the increase”. The stronger your brand value, the higher your prices can become.
Distribution Chain Control
The ability to control your distribution chain will also make it much easier to pass on any higher costs in production. For instance, e-commerce company Zoom has managed to achieve a 115% sales growth CAGR on stock price over the past 3 years.
Specialization and Innovation
Both are quintessential in determining your pricing power, as they bring added value to the offering table for customers—especially early ones. They are willing to pay a premium over competitive products if new and driven by industry-specific innovation. For example, technological advances within the pharmaceutical industry mean a successful continuation of price increases for patients.
The importance of keeping pricing on your management agenda
Having pricing at the top of your management agenda, as well as measuring it, monitoring it and communicating it, is crucial. Communication with customers and competitors will be essential for anticipating their expectations, while communication within the organization will ensure there is no confusion and everyone is pulling together.
Our recent Simon-Kucher study explored the experiences of companies in the area of pricing. Only 37% of participants said they were not involved directly or indirectly in a pricing war, although 57% of participants confirmed that price pressure has increased in the last year.
We also discovered that 68% of companies plan to increase the price at most in line with inflation in 2021, which is consistent with the undervaluation of price as a profit lever.
A simple, three-step process
Now is the time to implement the strategies that will undoubtedly alleviate the pressure on your margins. This can be achieved in three simple steps.
• Step 1: Apply a straightforward framework, starting with a clearly formulated pricing strategy that sets out the direction to manage price priorities and market dynamics.
• Step 2: Identify your value drivers. Ensure you have the optimum product prices before going into execution.
• Step 3: Implement price governance, which provides structure and ensures control so that all these steps are taken seriously and are also being followed diligently.
Getting ahead of this now will allow you to stay ahead of inflation, while ensuring your customers feel seen, heard and served.