Price Inflation in Industrials: Successful Price Adjustments for B2B Companies

June 30, 2021

pricing

Companies around the world are feeling the impact of the COVID-19 crisis. In many countries, strict safety measures and imposed lockdowns are causing a decline in customer demand and sales numbers. In addition, erratic reopening strategies and different approaches at federal and state levels are causing mixed feelings. How does this affect B2B industries in particular? How can they take action?

The outlook for 2021 and 2022 is fraught with rising inflation. In May, Eurozone inflation rose to two percent, therefore surpassing the European Central Bank’s target for the first time in more than two years. The jump from 1.6 per cent in April followed an even sharper acceleration of consumer price growth in the US, which recently hit 4.2 per cent. The Eurozone’s increase is likely to fuel investor anxiety that central banks will hasten the winding down of the vast monetary stimulus launched last year in response to the coronavirus pandemic.

B2B companies not equipped to handle rising price inflation

The consequences for the B2B sector should not be underestimated: Industrial companies have not had rising inflation on their agenda for a long time. Now, however, rising costs in purchasing are putting more pressure on companies’ profitability. This pressure is particularly strong after this past year, as the decline in demand and additional crisis discounts have eaten away at companies’ earnings. Companies’ profitability will also be susceptible to another risk. The repercussions of previous financial crises and the impact from the current crisis have led to significant exchange rate fluctuations. In 2020, compared to China, Japan, and the US, these rates exceeded 10 percent at the expense of a strong euro. This means export-oriented companies in the Eurozone need to implement price increases of up to 10 percent in order to avoid a drop in earnings with unchanged sales.

What’s more: Industrial companies tend to have rather long sales cycles (e.g. in machinery or plant engineering) and/or long-term contracts (e.g. regarding packaging materials), which means that adjusting prices to battle higher raw material costs and fluctuating exchange rates isn’t something that can be undertaken quickly or easily. What are the consequences? This year, the challenge faced by industrial companies has to be to reduce the number of crisis discounts they offer and to pass on inflation-related increases in purchasing costs. Henceforth, they have to take monetary devaluation into account when determining the pricing for new inquiries. For any new orders, inflation and potential future volatility must be considered in the contract design (e.g. by introducing opening clauses). Existing contracts may need to be adjusted for inflation.

Set up successful price adjustment management in four steps

However, many companies do not seem to be well prepared for this. According to the latest Simon-Kucher Global Pricing Study, 85 percent of industrial companies are planning price adjustments in 2021 to respond to inflation. Last year, however, only seven percent of industrial companies surveyed were able to achieve a price realization of 80 percent or more. Following a step-by-step approach can help firms to adjust their prices more successfully.

One reason for poor enforcement rates are static price measures that are often far too general. In addition, B2B companies often lack defined processes and automatic operations because they only carry out price adjustments annually, if at all. They have a semi-institutionalized pricing process, which involves many manual interventions and rounds of decision-making that drag on for several months. In a volatile environment, such processes, the associated use of resources, and wasted profits are too costly and no longer sustainable. However, the four following steps will enable companies to set up successful price adjustment management:

Step 1: Make differentiated list price adjustments annually

Many companies in the technology industry adjust their list prices too infrequently or if they do so regularly, they adjust them at a flat rate (e.g., “plus two percent on everything”). As a result, more and more list prices of already highly competitive products have become “moon prices,” i.e., arbitrarily set and inflated prices. To successfully adjust prices, companies need to tweak their product prices in a differentiated manner, e.g., based on the degree of differentiation of the products, lifecycle phase, or characteristics (fast-moving vs. slow-moving).

Step 2: Make dynamic target price adjustments according to the situation

Situational, order-specific pricing and pricing decisions are an essential part of sales work. Unfortunately, many companies’ pricing is static, manual, and based on gut instinct. In addition, it’s often based on guidelines and not stored in a tool or system. This makes following a dynamic approach and adjusting and implementing target prices in a timed and tailored manner practically impossible. Companies need an agile pricing system that takes into account situational factors, such as product mix, customer type, and order quantity, and dynamic factors, such as inflation, currency development, and capacity utilization. Implementing the right digital tool can help companies with pricing.

Step 3: Clearly manage the defined responsibilities and processes

Price is the number one profit driver. In terms of its importance for a company’s profit, the institutionalization rate of price is still rather low at B2B companies. In many companies, the sales department is responsible for all aspects of pricing. However, above a certain size, organizations need to appoint someone, such as a pricing manager or pricing director, to take care of, maintain, and orchestrate all pricing-related processes and guidelines. Those without a designated expert lack professionalization and, as a result, pricing power. Companies should invest in such a position to serve as the intersection between product management, sales, and controlling can do so with suitable central/decentral positioning if necessary.

Step 4: Ensure the company has a suitable database and analytics capabilities

Even in the age of digitalization, many companies lack the resources and therefore the skills to prepare and extract valuable, existing data from their systems for pricing decisions. Often, the problem isn’t that the data isn’t available but rather that it has to be extracted and compiled with a great deal of manual effort. Many of the tools available to companies today, such as Power BI and Tableau, can create dashboards and perform analyses and are standardized enough to build a decision-relevant fact base. In addition, every company’s pricing department should have a workflow platform for triggering and carrying out list price adjustments or situational target price adjustments as part of their basic toolkit.

Contact us for further information and best practices on pricing and commercial excellence in your industry!