In the last couple of years, I have noticed more and more companies struggle with executing price increases for their products or services. “Our net prices dropped 2% after our recent 7% list price increase” is unfortunately not an unusual comment. You are probably wondering how a company can end up with lower net prices as a result of a price hike. The story usually goes like this:
- Company raised price
- Competition did not follow
- Company saw volume drop and pumped money into discounting to drive volume
- Competition reacted by increasing their own promotions
- Company reacted by discounting even more and ended with a lower net price
- Worst of all, the company just spent the last 6 months talking about “price price price” instead of focusing on creating more value for the shoppers
While this example may seem a bit extreme, the majority of companies actually fail to achieve their target price increases. According to our firm’s Global Pricing Study, companies are only achieving 37% of a target price increase. That’s down from 50% just two years ago. And the lowest realization rate we have ever measured in our Global Pricing Studies.
Here are 3 mistakes companies make when they face price pressure ... and how to avoid them:
Spreading the peanut butter
This means you spread your price increase evenly across your product portfolio. 5% across all SKUs. Done. The key advantages of this “peanut butter” move are that it is easy to do the math and easy to communicate internally and externally. Unfortunately, not all your products are created equal. Surgically increasing your prices by studying the pricing power within your portfolio is critical. We found $10M in profit for one of our clients by raising prices of select SKUs in select store locations. The key disadvantage of surgical price increases is that it is hard work. It took weeks of crunching massive historical sales data series to uncover the sweet spots with high pricing power.
Cutting costs when you think you can’t raise prices
After a 25% drop in profit in the latest quarter due to weak demand despite higher promotion spending, General Mills announced its plans to cut costs by an additional $100M. Kellogg made a similar announcement back in July. Don’t get me wrong, finding efficiency is important. However, cost cutting is not a sustainable solution to weak topline growth. It cannot continue indefinitely because the benefits from these initiatives would eventually start to become diluted. Making matters worse, the loss of human capital due to downsizing can cause a further loss in competitiveness in innovation and eventually, sales. The solution must involve increasing perceived value, not just cutting costs. This leads to the third mistake.
Taking your eye off of value
Speaking of innovation and sales, 77% of executives in our study cited “introducing new, innovative, or differentiated products” as a requirement to deal with increasing price pressure.
However, 72% of all new products flop. Why? It’s often because companies neglect or ignore key pricing and marketing activities until it's too late. They don’t have their eye on value right from the beginning of the product development process.
The 2014 Global Pricing Study reveals that the share of successful product launches doubles when a company takes pricing into account continually. This is – from the start of the product development process through to the launch – rather than neglecting or ignoring pricing until just before the launch.
Companies who outpace their competitors in EBITDA and price realization are more likely to invest in the discipline of capturing value via price. Don Blair, CFO of Nike, spoke publicly about their investment in a new pricing team to “optimize the price value equation” and to “raise prices, particularly around product innovation and brand strength.” Nike has raised prices successfully while the competition still relies on discounting to drive traffic.
How are you fighting increasing downward price pressure in your market? What has worked for you when implementing higher prices?
About the Simon Kucher & Partners Global Pricing Study 2014: Approximately 1,600 executives and managers from all major industries and from over 40 countries across Europe, the Americas, and Asia took part in our online study in May/June 2014. Simon-Kucher & Partners conducts this study every two years in collaboration with the independent Professional Pricing Society (PPS).