As in any sector, increasing prices in the consumer goods industry is a delicate task. Retailers often block any attempt to adjust prices and manufacturers’ efforts typically amount to nothing. As a result, many companies prefer to put the topic on the back burner. However, with the right strategy in place, companies have no reason to worry about raising their prices. Here we offer five tips for successful price increases.
Rising costs, aggressive competitors, a saturated market, and increasingly ambitious profit targets. Companies in the fast-moving consumer goods industry (FMCG) are facing numerous challenges. In the last few years, revenues of the 50 largest consumer goods manufacturers in the world has risen by five percent, after a long period of stagnation. However, this wasn’t primarily generated by organic growth; it was due to a significant increase in acquisition activities. At an average rate of 2.6 percent, organic growth remains a major problem for FMCG companies, with volume growth as low as 0.6 percent.
The shortage of agricultural commodities due to climate change poses a financial challenge for food manufacturers. Crop failures caused by this summer's long heatwave have seen significant price rises for basic foodstuffs such as wheat and potatoes. Due to a drop in barley yields, experts predict the price of beer will double, and in some parts of the world beer could become as much as four times more expensive. This is a problem that is only set to get worse in the years ahead.
Stability through price increases?
In order to keep revenues stable, many companies feel forced to pass on these higher costs to retailers – a difficult proposition for any supplier. From a recent client survey, we found that companies need to increase their prices at least once a year in order to protect their profits. However, only 17 percent of survey participants have actually been able to enforce higher prices at retail. The rest either failed completely, or, due to less favorable sales conditions, only benefited slightly from their prices increases – a lot of work for little payoff. It’s no wonder that, in light of these slim prospects, companies prefer to avoid the topic of price increases entirely. With rising costs for raw materials, profit is now on the line.
Five tips for successful, durable price increases
Not too much, not too little – to accomplish this balancing act and master the art of price increases, every company requires a suitable strategy. With many years of experience in numerous FMCG projects, we have been able to discern several success factors that enable companies to manage their prices effectively and adjust them regularly.
1. Get retailers used to price increases!
Price increases are hardly ever welcomed with open arms by retailers. For this reason, many companies try to avoid this tricky subject for as long as possible. When it simply can’t go on any longer, companies try to push increases through quickly without adequate preparation. And then they are completed shocked when their attempts fail to have the desired effect. By conducting price increases every year, you can get retailers accustomed to the idea and make it a part of your annual agreements.
2. Justify differentiated price increases with product value!
Blanket price increases appear arbitrary and leave you vulnerable. Instead, we recommend to differentiate products according to price sensitivity and margin, and generate additional value with measures such as new packaging designs or better quality materials. The value of your product must be your central message. From our experience, 87 percent of companies make cost increases the sole focus of their communications, ignoring value as a topic. Don’t make the same mistake.
3. Keep sales conditions in mind!
Always consider the effects of price increases on your trade term system and adjust your discount levels if necessary to prevent high discounts from undoing the positive effect of your successfully implemented price increases. You can avoid this mistake by ensuring your trade term system remains closely tied to your overall corporate goals.
4. Set clear targets for sales!
Do you know your company’s competitive positioning? Does your sales team know how far it can go without negatively effecting revenues? Which concessions can they offer? To enable your sales team to work efficiently, you need to know the answers to these key questions. In addition, it is important to set clear responsibilities and escalation rules so that your sales teams can operate smoothly within the defined negotiation strategy.
5. Prepare your sales team properly for price increases!
Before you communicate your price increases to your retail partners, develop a powerful storyline. Anticipate potential objections from your customers and prepare suitable counterarguments. Only with proper preparation can you give your sales team the confidence it needs to negotiate successfully. And remember, increasing prices is, above all, a boardroom topic! Take on this responsibility and develop your capabilities for internal and external implementation, enabling you to master this difficult task.
By following these tips, you will be able to increase your price level, win back your pricing power, and increase your profits over the long term. Although nobody likes increasing prices, it is by no means impossible!