Oil Prices Are Falling. How About a Price Increase?

December 02, 2016

oil prices

Oil prices have dropped more than 50% since last year and global commodity prices are at their lowest in the last few years. While many are predicting oil prices to rebound from the below $50/barrel level, “rising costs” can no longer be the only excuse for price increases.

To drive profit growth… yes, you can cut costs, sell to more people and get them to buy more, but capturing value through price will always be one of the most powerful profit drivers. For an established brand, price increases are inevitable.

Companies around the world want to raise prices, but most have not succeeded. On average, only about one-third of all planned price increases actually get implemented. Companies raise prices by only 1.9 percent for every 5 percent they attempt. In fact, we are seeing “pricing power” – the ability to achieve higher prices – plunging to its lowest level in 5 years. These are the results of Simon-Kucher’s Global Pricing Study 2014.

This struggle is especially acute for FMCG brands in mature markets like the U.S. where retailers are powerful and competitive pressure comes from both deep-pocket national brands and low-cost private labels.

oil

While failure to raise prices can hurt short-term profit, it also has a big impact on long-term growth. Time and time again, stagnant profits leave companies without sufficient resources to finance future innovations.

The good news is you can increase your chances of success if you…

  1. Incorporate external indicators 
    Start with assessing consumer perception of each key product group’s relative value-price relationship. We recommend assessing four categories of indicators: consumer-, competition-, market- and margin-oriented. Companies that struggle, focus only on internal financial metrics and ignore the external dynamics.
  2. oil

     

  3. Take advantage of your portfolio to create a soft landing 
    Chances are you have multiple brands, sub-brands and pack-sizes in your portfolio. A uniform price increase is almost never the optimal strategy. By understanding the consumer’s volume migration pattern, you can vary the level of price increase so that part of your portfolio is relatively more attractive to catch the volume leakage before it goes to your competition.
  4. Focus on the category growth story As much as you can avoid it, a price increase should not be the headline. Time your price move with good news, for example, noticeable renovations in products or packaging or truly breakthrough innovations. Position the retailer story to be about driving category growth and make the price increase just one of the many bullet points in the broad commercial program.

Honestly, folks in the FMCG world already know this is the right thing to do (Unilever and Procter & Gamble are stated as examples by a recent WSJ article ), but not everyone does it. Why? Doing this requires planning the price increase as a proactive move and many price increases are reactive to a cost change. A wise industry veteran once told me, “If you use cost increases to argue for a price increase, be prepared to bring the price down when commodity prices go back down.”

X-factor: Keep calm and carry on In addition to incorporating the 3 success factors above, a well-planned price increase roadmap prepares for a short-term volume dip. Among consumers who notice the price change (most won’t), they may take a few shopping trips to get adjusted to the new normal. Leaders who can stomach the dips will enjoy a much greater chance of getting the price increase to stick.