With inflation at levels not seen for decades in many markets, businesses face significant margin erosion. A recent ‘Inflation Pricing Study’ by global consultancy Simon-Kucher & Partners suggests that more than two-thirds of UK companies (70%) do not know what to expect regarding cost increases in the coming year due to the sharp increase in labour and production costs. At the same time, the study of more than 3,000 businesses across 20 countries showed that more than one in three UK firms (35%) have neither increased nor planned to increase their prices in response to climbing costs and inflation rates.
Around half of UK companies surveyed (54%) recognise the importance of price increases to counter the rise in costs. However, the report found that many UK companies are hesitant, with the loss of customers/volumes (due to price increases) not being an option for a quarter (25%) of respondents.
James Brown, a Managing Partner at Simon-Kucher, commented: “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.”
The study revealed that fewer than half of UK businesses (41%) 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 cost increases they felt able to pass on as price increases, UK respondents estimated on average, only 26%. On a 6% cost increase, this represents an additional 4.4% 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,” said Brown.
Where UK companies are implementing price increases, one in five (20%) were found to be implementing these evenly across their customer base, with no differentiation by willingness-to-pay or profitability. Simon-Kucher believes this lack of prioritisation represents a further lost opportunity for businesses to maximise the price realisation of their price increase programmes.
Peter Colman, another of the firm’s partners, said: “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 with the sort of inflation levels that we are seeing now. Salespeople need training on how to communicate price increases, how to handle with highly emotional pushback from their customers, and guidance on what concessions, if any, are allowed.”
