Recent study reveals a third of businesses at risk from rising inflation and lack of effective pricing management
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%) expect costs to increase by more than 6% 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 businesses across 20 countries showed that one in three businesses (31%) 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%) 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 7 out of 10 respondents. These price pressures will have implications for not just businesses but for everyone – including end consumers and stock markets.
Eventual price increases will have widespread impact
The study revealed that approximately half of businesses (52%) 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%. “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,” says Tim Brzoska, Senior Partner in the Consumer Sector at Simon-Kucher & Partners.
Current inflation rates require dormant skills from many
Where companies are implementing price increases, 1 in 4 (26%) 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.”
Zooming in on the UAE
While UAE inflation rates (2.5% in 2021) are below global levels, we have still seen an increase of 458 bp over the last year: competition and consumers alike are sure to act and react. Our assessment of companies in the UAE yields 3 core insights: (A) Prices increases are a core lever for countering costs yet ~30% of companies remain unprepared; (B) Loss of volume is accepted as a possible outcome, but customer retention remains key; and (C) Regional companies place heavier emphasize on using price increase to mitigate profit loss.
