B2B companies are under great cost pressure due to the soaring inflation rates. This makes price adjustments practically unavoidable. But how can price increases be effectively implemented with business customers? We explain the challenges B2B companies are currently facing due to global inflation, and give you tips on how to adjust your prices successfully.
The rate of global inflation is at an all-time high; in March 2022 it was 6.2 percent*. This represents a major challenge for companies, one reason being that many of the leadership have never faced such noticeable inflation. This might explain why actions taken to mitigate the effects of inflation are surprisingly minimal, as we found in our study.
We surveyed over 3,000 companies, two thirds of them manufacturers and service providers in the B2B sector, on the subjects of inflation and price increases. The main finding: Pricing as the most important lever is far too often ignored.
The leadership lack confidence when it comes to price adjustments
Adjusting prices? Many companies decide against it, as our study shows. And they often stick to this decision even though the majority of them are convinced that costs will rise. How far, no one knows for sure.
46 percent expect a cost increase of more than three percent. A quarter of those surveyed expect significantly more. However, not everyone has a clear idea: Almost half (48 percent) of the B2B companies surveyed cannot yet estimate how their cost situation will develop.
This divided picture also affects price adjustments. Some hesitate, unsure of how to react to rising costs. One in three (30 percent) companies have neither implemented nor plan to implement price increases. Instead, some are focusing on further increasing sales and increasing efficiency.
The problem is that even though optimizing processes and costs always makes sense, it has clear limits. According to our study, companies can absorb only 14 percent of the expected cost increases through process and cost optimization. This should make it obvious to all those involved that it is not a question of if, but how, they increase their prices.
New standards necessary for price increases
Successful price adjustments depend on how decision makers execute them. A differentiated approach that takes into account the willingness of customers to pay is important. Here too, our study shows clear potential for optimization. 24 percent of the B2B companies surveyed are simply increasing their prices overall, with each customer receiving more or less the same increase. However, this increases the risk of losing many customers, something that the majority (57 percent) are concerned about and 29 percent flatly reject.
However, it is not just the fear of losing customers or volumes that limits companies and their success with price increases. One in five companies (22 percent) can only adjust their prices once a year due to contractual restrictions. The same amount (22 percent) secure a little more flexibility through price clauses and floater regulations, i.e. automatic price adjustments based on previously agreed indices, but this is not a long term solution either. Instead, we recommend creating a basis for adjusting prices several times a year if necessary. The current inflation can serve as an opportunity.
Use inflation as an opportunity to rethink pricing strategy
If there is at least one positive aspect of inflation, it’s that the current inflation rates are no secret and affect everyone. There are frequent reports in the media that cause a broad social debate. For B2B companies, this environment opens up opportunities to implement price increases relatively easily. In fact, many customers expect them. However, it is important to prepare price increases thoroughly, and to accompany them with well-considered communication, all while reconsidering the existing standards.
Three aspects are of key importance:
- Differentiation instead of “the peanut butter spread approach”
Companies should implement differentiated price adjustments, ideally based on their customers’ willingness to pay for products or services. Alternatively, they could also choose customer-specific enforceability as a differentiator. However, we advise companies to be cautious when differentiating based on customer profitability. In this case, they often focus (unsuccessfully) on the less profitable customers, at the same time ignoring the potential for increases with the more profitable customers. We therefore recommend raising prices in one way or another for all customers.
- Allow for moderate losses
The fear of losing customers or volumes can paralyze decision-makers. However, our experience has shown that fears of very high losses usually turn out to be unfounded. Losses can be kept to a minimum primarily through applying differentiated pricing approaches. However, companies should allow for a certain amount of customer or volume losses.
- Create more flexibility
Being able to adjust prices only once a year harbors risks; companies are unable to respond rapidly to volatility or rising costs. Automatic price adjustments are also restrictive because they cannot take into account the individual development of the cost structure in the company. This can be a disadvantage, especially with high inflation rates. On the other hand, contracts in which prices can be renegotiated several times a year as needed offer more security in the event of a cost increase.
With new standards for price increases, B2B leaders can face rising costs caused by inflation more calmly. That’s why it is important to check the current procedure: Is there already price differentiation in place – and how is it executed? Are losses calculated? How much flexibility do the current contracts offer? One thing is clear: The more effectively companies position themselves now, the more successfully they can renegotiate prices and ensure long-term success despite rising costs.
*Oxford Economics; CPI, PPI (Mar 2022)