Despite significant cost increases, many businesses are avoiding raising prices in anticipation of excessively high-volume losses
With inflation at levels not seen for decades in many markets, businesses are facing significant margin erosion. A recent Inflation Pricing Study* by global consultancy Simon-Kucher & Partners revealed that a third of businesses (32 percent) expect costs to increase by more than six percent in the coming year, as a result of the sharp increase in labor and production costs. At the same time, the global study of more than 3,000 business across 20 countries showed that one in three businesses (31 percent) have neither increased nor plan to increase their prices in response to climbing costs and inflation rates.
Price pressures continue to build
The majority of companies surveyed (58 percent) recognize the importance of price increases to counter the rise in costs. Companies are hesitant over the best approaches though, with excessive volume loss due to price increases a key concern for seven out of 10 respondents. These price pressures will have implications for not just businesses but for everyone – including end consumers and stock markets.
Tim Brzoska, Senior Partner in the Consumer Sector, comments: “We are seeing a lack of confidence from businesses about how and when to implement price increases. Given the typically low inflation levels over recent years, this is something new for many companies to grapple with. However, a lack of effective price management represents a real threat for businesses, including through negative effects on share price and investor confidence. The reality is, failure to pass on costs risks significant margin erosion and their long-term viability.”
Eventual price increases will have widespread impact
The study revealed that approximately half of businesses (52 percent) have a price increase or further price increase planned. How effective these will be in terms of combatting rising costs is unclear though. When asked how much of the expected costs increases they feel able to pass on as price increases, respondents estimate on average only 30 percent. On a six percent cost increase, this represents an additional 4.2 percent of costs hitting the bottom line for businesses.
“Many companies have yet to pass on their costs. This suggests that when they do, there will be a significant additional inflationary impact felt by consumers,” adds Brzoska.
Current inflation rates require dormant skills from many
Where companies are implementing price increases, one in four (26 percent) are implementing these evenly across their customer base, with no differentiation by willingness-to-pay or profitability. This lack of prioritization represents a further lost opportunity for businesses to maximize the price realization of their price increase programs.
"Price increases are a very sensitive topic, especially for companies with long-standing customer relationships. Many of the current management teams will not have seen inflation at these levels, meaning companies need to quickly regain pricing expertise and muscle that has lain dormant in recent times," says Philipp Biermann, Global Head of Business Services at Simon-Kucher. "So right now, a well-thought-out pricing and communication strategy is fundamentally important for companies to survive the competition.”
Complete study findings are available upon request, including country splits.
*About the Study: The Inflation Pricing Study was conducted online between December 2021 and March 2022 by the global consultancy Simon-Kucher & Partners (via YouGov). Over 3,000 companies from across 20 countries were surveyed on the topics of inflation and price increases.
