Manufacturers in the UK are losing 30% of profits because of poor pricing power within the industry, according to the Global Pricing Study 2011.
Pricing power can be defined by the ability of companies to get the prices they deserve for the value they deliver to customers. The study concluded that 53% of manufacturing companies had low pricing power and were therefore averaging a 30% loss on profits as a result.
The 53% admitted that they had very little or no pricing power, which is the reason why the value delivered outweighs the value extracted. Only 47% had the know how to turn value into money.
High pricing power companies go to market with much more ambitious price rise targets than low pricing power companies concluded the report by Simon-Kucher, the strategy and consultancy firm who conducted the study.
Figures show that 84% of high pricing power firms are increasing prices above this year’s inflation rate while only 44% of the low pricing power companies are doing the same.
Staggeringly, the remaining 56% of low pricing power companies are raising their prices in line with, or below the rate of inflation. Unsurprisingly, these companies have significantly lower three year profit increase expectations in comparison with their high pricing power peers.
One concern for manufacturers producing high volume, low priced goods, is the fear that they will lose sales to overseas companies who have lower input costs.
Simon-Kucher asked high-level decision makers from all major manufacturing industries about their profit culture, pricing power, the profit outlook and the manner by which they protect themselves from inflation risk. The results show that low pricing power companies underestimate the inflation threat and are badly prepared when it comes to raising prices.
Harald Schedl, managing partner at Simon-Kucher, said: “Power pricers recognise the need to set an aggressive price increase in this economic environment. It’s very dangerous for your company’s profitability to use the inflation rate as a price increase benchmark. The low pricing power companies that don’t realise this will end up paying the difference.”
Dr. Peter Colman, director at Simon-Kucher explains, “Manufacturing companies typically spend far more time focusing on value creation than value extraction. They need to focus on closing the gap between the target and the company’s realised price by implementing policies to guide their sales force.”
Mr Colman added: “Now is the time to arm your organisation with pricing power, put in a strong price increase, and defend it in the market. Those companies that do this will have significantly higher profits.”