London: Weak pricing cuts manufacturing profits by 30 percent, according to the largest ever pricing study by global pricing strategy consultants Simon-Kucher and Partners.
53 percent of manufacturing companies are not able to charge the prices they deserve in comparison to the value their products and services deliver. As a result, they lose on average 30 percent of profits. These companies are adjudged to have 'low pricing power'.
Companies with 'low' and 'high' pricing power expected to capture a very similar percentage of their target price increase but the big difference is that the 'high' pricing power companies go to market with much more ambitious price rise targets. 84 percent of 'high' pricing power companies are increasing prices above the inflation rate this year. Only 44 percent of the 'low' pricing power companies are doing the same. Staggeringly, the remaining 56 percent of 'low' pricing power companies are raising their prices either in line with or below the rate of inflation. With these latter companies only capturing slightly over half of their target, this is not going to be enough and they are placing themselves in serious inflation risk. Unsurprisingly, these companies have significantly lower three year profit increase expectations in comparison with their 'high' pricing power peers.
These are the key findings of Simon-Kucher and Partners' Global Pricing Study 2011. The pricing experts asked high-level decision makers from all major manufacturing industries about their profit culture, pricing power, the profit outlook and the manner by which they protect themselves from inflation risk. Almost half of the respondents from Europe, the US and Asia are from companies with more than one billion euros in sales (C-level executives account for one-third of the respondents). The study results show that 'low pricing power companies' underestimate the inflation threat and are badly prepared when it comes to raising prices.
Pricing power untapped
Pricing power can be defined by the ability of companies to get the prices they deserve for the value they deliver to customers. Only 47 percent have sufficient pricing power and 'know how' to turn value into money. The remaining 53 percent of companies admit having very little or no pricing power, which is the reason why the value they deliver outweighs the value extracted. The weak performance is very costly, cutting profits by an average of 30 percent.
Is your company inflation safe?
Pricing is a topic that has historically been neglected by many companies, who will unfortunately pay the consequences as inflation pressures the global economy. The survey findings reveal that both 'high' and 'low' pricing power companies are only capturing slightly over half of their target price increase. However, 'high' pricing power companies recognise
the threat that inflation causes and 84 percent of them are going to raise their prices above the rate of inflation.
"Power Pricers recognise the need to set an aggressive price increase in this economic environment. It's very dangerous for your company's profitability to use the inflation rate as a price increase benchmark. The 'low' pricing power companies that don't realise this will probably end up paying the difference" concludes Harald Schedl, Managing Partner at Simon-Kucher and Partners.
Measures to increase pricing power
Even though manufacturing is above the cross-industry benchmark for realisation of price increases, plenty of opportunities for improvement remain.
Dr. Peter Colman, Director at Simon Kucher and Partners explains, "Manufacturing companies typically spend far more time focusing on 'value creation' than 'value extraction. They need to focus on closing the gap between their target and their realised price by implementing policies to guide their sales force, rolling out value selling skills training and tailoring their incentive schemes to reward profit performance.
"Now is the time to arm your organisation with pricing power, put in a strong price increase, and defend it in the market. Those companies that do this will have significantly higher profits."
Global Pricing Study 2011
The Global Pricing Study 2011 from Simon-Kucher & Partners surveyed over 3,900 high-level decision makers from companies in all major service and manufacturing industries across Europe, the US and Asia. The research reveals profit orientation, pricing power, inflation and profit outlook. Almost half of the respondents are from companies with more than one billion euros in sales; C-level executives account for one-third of the respondents. The study was conducted in collaboration with the Professional Pricing Society (USA) and the IE Business School (Spain).
The management summary of the survey is available on request. Please contact Claudia Schulz at Simon-Kucher & Partners. Claudia.firstname.lastname@example.org, tel.: +49 228 98 43 372.