Inflation rates are rising drastically, driven up by ongoing supply chain disruptions, growing global volatility and increased consumer demand. The result? Businesses are facing significant margin erosion. We wanted to know how companies are handling the price pressure and conducted a global study to find out.
Around the globe, inflation rates are at a historic high: In the OECD area, year-on-year inflation rose to 7.7 percent in February 2022 from just 1.7 percent in February 2021. With rising costs and competition, companies have to come up with strategies to face this challenge.
As pricing experts, we know that a proven method to mitigate shrinking margins is effective price management. However, despite the ongoing situation, many businesses are avoiding addressing their price challenges. To find out the details and reasoning behind it, we decided to ask decision-makers directly. We conducted our global Inflation Pricing Study, in which we surveyed over 3,000 companies from across 20 countries on the topics of inflation and price increases between December 2021 and March 2022.
No price increases despite expectation of rising costs
What are the key results? Unsurprisingly, a third of businesses (32 percent) expect costs to increase by more than six percent in the coming year. Among the rest, there is a lot of uncertainty, but the common consensus is to be prepared for even higher inflation rates.
However, at the same time, more than 40 percent of companies have not carried out price increases in recent months. And almost 50 percent have not future price increases planned. Combining these, one third of companies surveyed globally have neither implemented nor planned price increases and will therefore remain stuck with the costs.
Given these figures, we asked the survey participants about their overall strategies to counter rising costs. While the majority of companies (58 percent) recognize the importance of price increases in this regard, more efficient processes/cost savings were named by 24 percent and sales and marketing campaigns to increase volume by 18 percent.
Lack of effective price management
Even among those who think increasing prices is the way to go, there are doubts about the best approaches. Seven out of 10 respondents are concerned that price increases would result in excessive volume loss and almost one in three companies categorically rules out any actions impacting volume. Only 16 percent include a loss of customers or volumes in their calculation of consistent price increases, even though this is a best practice strategy.
In addition, we are witnessing a lack of confidence from businesses about how and when to implement price increases. More than 30 percent of companies surveyed make the mistake of deploying higher prices evenly across their customer base, not taking into account profitability, enforceability, or willingness-to-pay. Following this strategy, they actually decrease their chances of customers accepting the higher prices, failing to capture the full potential of their price increase measures.
The timing of price increases is also quite often worthy of improvement: Less than a quarter of companies adjusts prices several times a year as necessary. Almost 30 percent discuss this only once a year, and 26 percent when customers initiate new tenders or contracts expire.
Summary: Improve your pricing now!
Price increases are a very sensitive topic, especially for companies with long-standing customer relationships. However, with their current strategies, many companies won’t be able to pass on rising costs. This is likely to result in significant margin erosion and – in the end – effect companies’ long-term viability gravely. Improving their price management and developing smart approaches to increase prices is the only solution to manage the ongoing spikes in inflation.
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