Despite significant cost increases, many businesses are avoiding raising prices in anticipation of excessively high-volume losses
With inflation at levels not seen for decades in many markets, businesses are facing significant margin erosion. A recent Inflation Pricing Study* by global consultancy Simon-Kucher & Partners revealed that more than two thirds of UK businesses (70 percent) did not know what to expect regarding cost increases in the coming year, as a result of the sharp increase in labour and production costs. At the same time, the global study of more than 3,000 business across 20 countries showed that more than one in three UK businesses (35 percent) have neither increased nor plan to increase their prices in response to climbing costs and inflation rates.
Price pressures continue to build
Around half of UK companies surveyed (54 percent) recognise the importance of price increases to counter the rise in costs. Many UK companies are hesitant though, with the loss of customers/volumes (due to price increases) not being an option for a quarter (25 percent)of respondents. These price pressures will have implications for not just businesses but for everyone – including end consumers and stock markets.
James Brown, Managing Partner of the London Office, comments:
“We see many businesses lacking the confidence to implement price increases. With many years of low inflation in most sectors in the UK, this is something new for most companies to have to deal with. This lack of effective price management experience and capability represents a real threat for businesses impacting their share price and investor confidence as well as their profitability. Failure to pass on costs – through headline increases or reducing promotions/discounting, risks significant margin erosion and their long term viability.”
Eventual price increases will have widespread impact
The study revealed that fewer than half of UK businesses (41percent) have a price increase or further price increase planned. How effective these will be in terms of combatting rising costs is unclear though. When asked how much of the expected costs increases, they feel able to pass on as price increases, UK respondents estimate on average only 26 percent. On a six percent cost increase, this represents an additional 4.4 percent of costs hitting the bottom line for businesses.
“UK respondents were even more uncertain than others about the cost increases they were expecting. Many companies have yet to pass on their costs. This suggests that when they do, there will be a significant additional inflationary impact felt by consumers” adds Brown.
Current inflation rates require dormant skills from many
Where UK companies are implementing price increases, one in five (20 percent) are implementing these evenly across their customer base, with no differentiation by willingness-to-pay or profitability. This lack of prioritisation represents a further lost opportunity for businesses to maximise the price realisation of their price increase programmes.
“Many sales teams often lack ‘muscle memory’ when it comes to price increases. It is important that management teams recognise that a large proportion of their salespeople have never experienced selling in a high inflationary environment before. Furthermore even those with sufficient tenure to remember previous inflation spikes haven’t had to deal the sort of inflation levels that we are seeing now,”
says Peter Colman, Partner in the London Office of Simon-Kucher.
“Salespeople need training on how to communicate prices increases, how to handle with highly emotional pushback from their customers and guidance on what concessions, if any, are allowed.”