Industrial manufacturers are facing significant challenges due to the increasing prices of raw materials. The majority of experts from the construction, chemicals, and materials industries expect price volatility to continue. A study by Simon-Kucher & Partners shows that companies are not implementing price increases on a large enough scale to compensate for this lasting instability.
The prices of raw materials such as steel, wood, silicone products, acrylates, and resins have strongly increased since the start of the ongoing COVID-19 crisis. In the last six months alone, prices have gone up 50 to 100 percent. A recent study by the global strategy and marketing consulting firm, Simon-Kucher & Partners, shows that manufacturing companies attribute this primarily to a sharp rise in demand, stockpiling effects, and production capacities that have not yet been fully ramped up.
These price increases pose major challenges for companies in the construction, chemicals, and materials industries — and experts aren’t hopeful the situation will resolve quickly. Half of study participants don’t expect prices to drop for at least another 6 to 12 months, and a third think prices will remain high permanently or even rise. “If companies want to maintain their margins, they have to increase their prices to offset growing material costs,” says Dr. Andrea Maessen, Senior Partner at Simon-Kucher. “If raw material costs go up 15 percent (with raw materials accounting for 60 percent of COGS), net prices have to be raised nine percent to achieve the same gross margin rate. And raw material costs have risen considerably more than that.”
Construction, chemicals, and base materials companies have not been able to successfully implement price adjustments
According to the study, however, companies aren’t taking the necessary measures to counter these sharp cost increases with higher selling prices. An alarming one-third of companies (36 percent) has not yet implemented price increases. While 18 percent of companies have at least announced that they’ll be raising their prices, another 12 percent are getting ready to. 64 percent have already adjusted their prices, but only 47 percent have managed to achieve more than 50 percent of their initial targeted increase. “This means that for at least half of the companies (53 percent), the sharp cost increases are to the detriment of earnings and are not sufficiently translated into price increases,” says Sebastian Strasmann, Partner at Simon-Kucher.
Market conditions and price mechanisms explain the inability to impose low prices
When asked what’s preventing them from raising prices, companies cite the sluggishness of the market. Nearly 60 percent of participants think that the industry is simply not used to short-term price increases, especially when there is one after another. Furthermore, according to 45 percent of respondents, customers find it difficult to pass on price increases in the value chain. However, more than 40 percent also believe that their own sales teams are undermining efforts to increase prices for fear of losing business.
For this reason, most companies start internally to up the odds for a successful price increase: 61 percent of the study participants focus on preparing and communicating concrete arguments for cost necessities in order to convince both their own salesforce and customers of the need for price adjustments. Fifty percent also differentiate the price increase according to product-specific cost increases so they’re able to clearly communicate that they’re only making price adjustments where it’s absolutely necessary. “Companies are already on the right track,” says Jan Haemer, Partner at Simon-Kucher. “But a successful price adjustment strategy involves far more than that. Developing a dynamic price management strategy, focusing on strategic planning, and introducing sensible price mechanisms such as inflation surcharges or price escalation clauses are all key to making successful price adjustments.”
*About the study: Simon-Kucher & Partners conducted the survey in June 2021 in Germany. Approximately 300 decision makers from multiple industries were asked to assess the increasing costs of raw materials: construction/building services engineering (54 percent), chemicals/raw materials (22 percent), construction materials/metals (11 percent), and associations/other (13 percent). Of these, 72 percent were manufacturers and 11 percent were retailers. The study results are available on request.
Simon-Kucher & Partners, Strategy & Marketing Consultants: Simon-Kucher & Partners is a global consulting firm specializing in TopLine Power®. Manager magazin, Wirtschaftswoche, and brand eins rated Simon-Kucher the best marketing and sales consultancy and named it a leader in pricing and value creation. The consultancy has more than 1,400 employees in 41 offices worldwide.