The rapid rise in inflation it is affecting the stability of many companies. The recent Study on Price Inflation* carried out by the global consultancy Simon-Kucher & Partners reveals that a third of the companies (32%) expects costs to increase by more than 6% in the next year, as a result of the strong increase in labor and production costs. At the same time, the Global Study of more than 3,000 companies in 20 countries shows that one in three companies (30%) have not increased or plan to increase their prices in response to rising costs and inflation rates.
Price pressures continue to mount
The majority of companies surveyed (58%) recognize the importance of price increases to offset rising costs. However, companies are hesitant about the best approaches, and excessive volume loss due to price increases is a key concern for seven out of ten respondents. These price pressures will have implications not just for businesses but for everyone, including end consumers and stock markets.
Ignacio Gómez, managing partner of Simon-Kucher in Iberia, comments: “In the current context that we are experiencing, we see that companies doubt how and when to make price increases. In the best of cases, companies know how to manage demand cycles in typically low inflation environments, this new inflationary environment poses a new challenge for many. The lack of effective price management poses a real threat to companies and their shareholders. The reality is that, if no action is taken, a cost increase greater than the price update will erode margins and put the viability of the company at risk.”
Eventual price increases will have a widespread impact
The study reveals that approximately half of the companies (52%) have planned a price increase or a additional price increase. However, it is not clear whether they will be effective in terms of combating rising costs. When asked how much of the expected cost increases they feel able to pass on in the form of price increases, respondents estimate just 30% on average. With an increase in costs of six percent, this represents an additional 4.2% of costs, negatively impacting the profit of companies.
“The inflation of industrial goods is still higher than the inflation that we are seeing in consumption. This implies that many companies still have to pass on their costs in prices and when they do so, consumers will feel a significant additional inflationary impact”adds Ignacio Gómez.
Inflation rates require certain skills in organizations
Where companies are raising prices, one in four (26%) are doing so evenly across their customer base, without differentiation by willingness to pay or profitability. This lack of prioritization it represents another missed opportunity for companies to maximize the bottom line in executing their price increase programs.
“Price increases are a very sensitive issue, especially for companies with historical relationships with their customers. Many of today’s management teams will not have experienced inflation at these levels before, which means companies need to quickly regain the pricing expertise and bargaining power that has lain dormant in recent years.”, assures Ignacio Gómez. And he adds: “So right now, a well-thought-out pricing and communication strategy is fundamentally important for companies to survive the competition.”
In Spain, an even greater number of companies (44%) expect a cost increase of more than 6%. However, compared to the world average, a smaller number of companies say they will bet on price management measures and in return will bet more heavily on sales and marketing measures in order to boost the volume. “This can give rise to a possible price war if the inflationary context generates a contraction in demand. This is a scenario for which companies should be preparing”, according to Ignacio Gómez. And finally, only half of the companies will accept volume losses as a result of price increases.
