This week new inflation figures were released in Europe. In the Netherlands the inflation rate was again very high at 10.2%.
Even though there are, undoubtedly, significant cost increases, many businesses still try to avoid raising prices in anticipation of high-volume losses. In this blog we will explain why optimising prices during inflation is an essential and inevitable measure for the success of a company.
The inflation, which levels are currently the highest compared to the last decades, resulted in a significant margin erosion. Global consultancy Simon-Kucher & Partners interviewed more than 3,000 businesses across 20 countries and found out that half of them expected the costs to increase by 10+ percent in the upcoming year as a result of the drastic increase in labour and production. Furthermore, about a quarter of the U.S. businesses have decided not to raise prices and do not plan to do so as a reaction to the skyrocketing costs and inflation levels.
CPI does not fully show the impact of the inflation on the industrial companies
Since the rates of inflation continue to grow, industries are facing severe problems which are underestimated by the Consumer Price Index (CPI). CPI mainly consists of three main components: housing, food/beverages, and transportation. All of them are highly dependent on upstream suppliers. The 39% increase in power, fuels and related products that go hand in hand with the transportation increase all left a significant imprint on industrial companies.
Serious challenges that industrials are experiencing due to inflation
While CPI metric is reaching 8.5%, producers are confronted by Producer Price Index (PPI) levels higher than 11.2 percent, and sometimes even higher. For example:
- Power, fuels, and related products PPI: 39.3 percent
- Chemical and allied products PPI: 26.2 percent
- New industrial building construction PPI: 19.1 percent
- Agricultural machinery and equipment PPI: 16.7 percent
To remain nimble industrial companies should track the changes in prices of the inputs and react to them on time.
Most industrial companies are not ready for expected cost increases
The study revealed that industries are not prepared for the upcoming cost increases. More than a half of the respondents who took part in the survey indicated that they are very uncertain about the rates of cost increases.
Industrial companies should be prepared for a continuation of the inflation levels and therefore increasing prices in response to the inflationary environment. The study showed that while 60% of respondents successfully implemented price increase, almost 40% did not effectively recover their costs.
At SYMSON we perceive 67% of the customers who are not able to optimise their prices because of an inadequate strategy or systems. Having the right systems and strategy in place during price volatility is more important than ever.
Companies are used to executing price increases annually or even less frequently. And these changes can sometimes take more than a quarter to implement. There is no doubt that the better a company understands the need of implementing price increases, the more successful it is. Nonetheless, less than a half of the respondents executed a price increase recently or plan to do so in the future. It is essential to get ahead of price increases and it is even more important to do it in a deliberate way that analyses both the products and the customers. It is crucial to understand that during inflation it became even more critical to maintain the profitability of the business and price increases are just inevitable.
But how do you ensure that your margin is not compromised? By using the right pricing strategy!
SYMSON has made a research and figured out what are the best pricing strategies for high inflation rates. The strategies can be used not only individually, but also in combination with each other, for an even better result!
- Cost-plus pricing model
With this pricing strategy, you calculate the cost of a product and add a profit margin to determine the price for your product. During a period of high inflation, it is useful for many companies to let the price of the product increase in line with the cost of the product. This is easy and convenient to implement. But if you only apply this pricing model, it can make your product less attractive to consumers in comparison to the competition.
- Competitive pricing model
With this pricing strategy you base your prices on the competition. You then try to always be the cheapest or, for example, to always offer the average available price. During times of inflation, when your competitors are also making changes in prices, it is more than useful to keep this information in mind. This way you can continue to distinguish yourself from the competition, completely in line with the company objectives.
- Dynamic pricing model
For many companies, a dynamic pricing model is the best option during times of inflation, especially if your company has a lot of different products. A dynamic pricing model is a pricing model that automatically adjusts prices to changes in various factors. For example, for an increase in costs, but also weather conditions or the prices of competitors can be included in a dynamic pricing model. By automating this with software and with the help of AI and algorithms, this model saves you a lot of hassle. The work is done for you and you also get the optimal prices for your product.
During times of high inflation rates, you as a company can come under pressure. In order to remain profitable, it is advisable to adjust and optimise your pricing strategies. The combination of different pricing strategies can be the best way to keep your prices optimal during times of high inflation.
SYMSON helps companies manage prices through intelligent pricing software and optimise margin by combining multiple pricing models.
Do you want a free demo to try how SYMSON can help your business with margin improvement or pricing management? Do you want to learn more? Schedule a call with a consultant and book a 20 minute brainstorm session!