Cost volatility in raw materials and transport

Posted on 28 Oct 2021 by The Manufacturer

Increased prices for commodities and transportation, costs incurred due to the impact of the COVID-19 crisis, arrears of price increases not implemented in 2020: As expected, all these factors are driving up inflation rates. However, most companies are not prepared for the economic impact. Dr Peter Colman, Partner and shareholder at strategy and marketing consultants, Simon-Kucher & Partners, explains how companies can manage and pass on cost increases by developing robust price rise processes.

The inflation rate in the UK has recorded its biggest ever jump, leaping from two percent in July to a nine-year high of 3.2% in August, according to the Office for National Statistics (ONS) – a sharp increase from the Bank of England’s target rate of two percent. Experts attribute this development to a rebound in restaurant prices which were artificially pushed down a year ago by government subsidies.

In addition, the Retail Price Index (RPI) rose even more significantly to 4.8%. And the Bank of England is still braced later this year for inflation to hit four percent due to higher energy prices and pandemic bottlenecks which it expects will fade over the course of 2022. Another figure by the ONS is also worrying: Producer prices, measuring the cost of goods leaving factory gates, are also on the rise, as businesses continue to struggle with higher fuel and raw material costs. As we can see, industry’s input prices showed a growth of 11% on the year to August, up from 10.4% in July, while output prices rose by 5.9%, up from 5.1%.

The rise in inflation was a widely predicted trend for 2021, as is reflected in the most recent Simon-Kucher Global Pricing Study. Almost 60% of companies surveyed from the UK experienced higher price pressure in the last 12 months. Most attribute this pressure to external factors, such as low-price competition and stronger customer negotiation power.

The study also revealed a lack of ambition and prioritisation when it comes to price. Only 27% of UK companies identified pricing as a key priority for 2021, even with the predicted rises in inflation. Additionally, while over 80% of companies reported planning price increases for 2021, many struggle with realisation. This becomes obvious when looking at the price realisation: Last year, on average, companies were able to only achieve 33% of their planned price increases. Factoring in that the majority planned for inflation-level increases at best, this leaves many companies in the danger zone.

How to Offset Inflation Through a Robust Price Increase Campaign. Image courtesy: Simon-Kucher Global Pricing Study 2021
On average, companies were able to only achieve 33% of their planned price increases. Factoring in that the majority planned for inflation-level increases at best, this leaves many companies in the danger zone. Excluded: Respondents who were unable to track their price realisation or who lowered their prices. Source: Simon-Kucher Global Pricing Study 2021

How can companies prepare for cost inflation, and improve their price increase capabilities?

Given the typically low inflation levels over recent years, many companies stepped back from consistent investment in pricing excellence. This is coming back to haunt them now, as an inefficient price increase process risks causing significant margin erosion. But how can companies increase their prices to offset inflation without breaking contracts, ‘waking the sleepers’, increasing churn, or damaging their reputation?

Simon-Kucher’s Price Increase Campaign is a framework that outlines three key phases with nine essential steps for companies to create a robust price increase process:

Configure price levels

  1. High-level targets: Consider and communicate relevant revenues only.
  2. Product-specific targets: Determine higher increase potential for value-added products and services.
  3. Customer-specific targets: Differentiate customers/customer segments and channels according to ‘ease of increase’. Make sure to focus on contracts that enable an increase, since some long-term contracts might be non-negotiable.

Get prepared

  1. Guidelines: Define clear escalation rules in case of derogations from targets.
  2. Sales incentives: Reward successful sales people for their price increases.
  3. Communication: Communicate price increases including reasoning externally and internally.

Roll-out the initiative

  1. Supporting material plus training: Provide battle-cards, argumentation guidelines, and negotiation trainings.
  2. Monitoring: Make sure there’s full internal transparency on the status of price increases at all times.
  3. Steer/counter-steer behaviour: React immediately and adequately if deviations from targets are observed.

By following these nine steps, companies can ensure higher realisation rates for future price increases as well as prepare themselves most effectively for dealing with continuing cost inflation volatility.

Summary: Price increases are possible – make sure to act now

As shown above, ensuring higher realisation rates for price increases is no impossible endeavour. However, since it involves a good deal of preparation, managers have to make sure to move now in order to not miss out this year. For many companies, the budget planning season starts soon and most price negotiations take place before the end of the year. To not pass up the chance to fight current cost inflation, companies therefore need to put the topic on their agenda quickly or at least adjust their plans for next year’s price increase. Remember, the best thing a salesperson can sell is a price increase.