Every second company involved in a price war, international study shows
Beijing, October 17, 2016 – Eight out of ten companies across industries are worried about rising price pressure. Many of the companies (49 percent) even say they are actively engaged in a price war. This is a key finding of the Global Pricing Study 2016*, conducted for the fourth time by the global strategy and marketing consultancy Simon‑Kucher & Partners. Approx. 2,200 managers in leading positions from more than 40 countries and a wide variety of industries participated in this year's study. These international numbers and their implications are alarming for companies in China. Especially with the e-commerce boom, markets are becoming increasingly open across country borders, making competition for Chinese businesses even more intense than ever and ultimately intensifying price pressure.
Margins drop further in 2016
Both increased competition with low-cost providers and stronger negotiation power among clients are exerting higher price pressure on companies in multiple sectors in China. In fact, price wars have become an almost normal practice in many industries. "The situation may even worsen in the future, since salary increases lead to cost increases," explains Fan Chen, Managing Director of Simon-Kucher's office in Beijing, as she assesses the local situation based on her extensive consulting experience. "Many companies have already exhausted all means to reduce costs. As a result, it has become very difficult to improve profit margins". However, as the international numbers show, Chinese businesses are in good company. In the Global Pricing Study 2016, only six out of ten firms indicate that they have managed to increase their margins over the previous year. In fact, the study reveals that companies' margins will decline by an average of 0.7 percentage points this year. "Given growing costs and increasingly open markets, companies in China are clearly set to face higher risks in future", Chen recaps.
The most successful companies handle their pricing more professionally
In the study, most companies admit that they have invested too little in price management. In fact, 87 percent of participants indicate that there is considerable need for improvement regarding price strategy, price control, and supporting tools. The 'best', in other words the Global Pricing Study's top 13 percent of companies, demonstrate the effectiveness of these tools: Investing in price management has put them in a much better position than their competitors. Their profits, as measured by EBITDA margins, are around a quarter (27 percent) higher than the profits of the 'rest'. David Vidal, study author and Partner at Simon-Kucher, clarifies, "These numbers weren't just pulled out of thin air. The 'best' are more professional in almost every area of pricing. For instance, they organize regular price increases as cross-functional projects, rather than simply delegating this important task to sales. Subsequently, the price implementation rate is 38 percent higher than for the 'rest'."
New products and better value communication to counter price pressure
The good news is that, according to the study, almost all companies, and not only the 'best', have meanwhile recognized that they need to systematically counter the rising price pressure. Two-thirds of companies rely on new products to avoid price pressure. For half of the interviewees, the most suitable option is to improve the value communication of products. "Chinese companies should focus more on how to better monetize the true value of their products. Changing the mindset from 'price selling' to 'value selling' would be an important starting point," comments Chen, advising companies not to put this on the backburner.
A summary of the study is available upon request.
*About the Global Pricing Study 2016: A total of 2,186 participants from companies of 25 industries and over 40 countries across Asia-Pacific, the Americas, Asia-Pacific and Europe, took part in an online study conducted by Simon-Kucher & Partners in the spring of 2016. Respondents, of which 38 percent are C-levels, answered questions on their pricing strategies, price pressure, and the competitive environment. The study takes place every two years and is the only one of its kind.
Fan Chen is the Managing Director of Simon-Kucher & Partners' office in Beijing and David Vidal is a Partner at Simon-Kucher.
Simon-Kucher & Partners, Strategy & Marketing Consultants:
Simon-Kucher & Partners is a global consulting firm with 930 professionals in 33 offices worldwide focusing on TopLine Power®. Founded in 1985, the company has more than 30 years of experience providing strategy and marketing consulting, and is regarded as the world’s leading pricing advisor.
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