Increasing low-cost competition and clients' growing negotiation power are just two of the reasons for rising price pressure. Companies can counteract through effective price management.
Bonn – The numbers are alarming: Eight 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.
Margins drop further in 2016
The increased competition with low-cost providers and clients' stronger negotiation power are given as the most important reasons for this price pressure. As a result, it has become very difficult to improve profit margins. Only six out of ten companies indicate they have managed to increase their margins over the previous year. "The situation will worsen, since salary increases in many industries are leading to cost increases by up to three percent", explains Dr. Georg Tacke, CEO of Simon-Kucher & Partners, "bringing down profits even further." The Global Pricing Study 2016 shows that companies' margins will decline by an average of 0.7 percentage points this year.
The most successful companies handle their pricing more professionally
In light of this, most companies admit that they have invested too little in price management. In fact, 87 percent of the 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, not only the 'best', have meanwhile recognized that they need to systematically counter the rising price pressure. Two-thirds of companies (66 percent) rely on new products to avoid price pressure. For half of the interviewees (50 percent), the most suitable option is to improve the value communication of products. "Those are important first steps. However, joining the ranks of the 'best' requires three to five years of hard work", acknowledges Tacke.
A summary of the study is available upon request.
Learn more about our recent Global pricing study reports here.
*About the Global Pricing Study 2016: A total of 2,186 participants, of which 38 percent are C-levels, from companies of 25 industries and over 40 countries across the Americas, Asia-Pacific and Europe, took part in an online study conducted by Simon-Kucher & Partners in the spring of 2016. Respondents 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.
Dr. Georg Tacke is the CEO of Simon-Kucher & Partners 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.