The last two years have proved a challenging time for businesses. While it is still too early to entertain the notion of a post-pandemic world, companies across various sectors are starting to see the shoots of recovery from the worst of the impact from the COVID-19 pandemic. Despite this optimistic outlook, now is certainly not the time for companies to rest on their laurels.
While some businesses have managed to weather the pandemic storm, the broader macroeconomic outlook looks less than rosy. Europe’s energy crisis, combined with conflict in Eastern Europe (both of which have resulted in oil prices rising by 44% over the past six months), U.S. inflation and an omicron outbreak in China, all threaten to plunge the global economy into recession.
It's not just the fortunes of the world’s major economies that threaten commercial success. Inflation rates in Qatar have averaged 6.5% in the last two years, while the United Arab Emirates has recently announced a 9% corporate tax rate to be introduced in June, 2023. For C-suite executives eager to maximize returns, the introduction of new tax regimes and the prevalence of high inflation rates often results in price increases. Executives across several sectors have announced price rises in recent months, including those at DHL, Kraft Heinz, Ralph Lauren and Airtel.
But if price rises in these circumstances are inevitable, the key consideration then becomes finding a price level that protects margins and revenue, while also sparing the company from any associated decline in volume. Finding the right price, as well as the most appropriate mechanism for implementing any price rises, is central to any company’s pricing strategy. One key tool to assist in this strategy is developing a better understanding of pricing power. Following are three factors that contribute to high pricing power.
Brand value. Strong brands have more scope to introduce price rises. When brand loyalty is high, customers exhibit lower price sensitivity and are better able to absorb any price rises that might be passed on to them. This is especially true in markets such as high-end retail. Indeed, as Ralph Lauren’s CEO attests, the prospect of a double-digit price rise often fails to deter a young and high-value clientele that is highly engaged with the brand.
Supply chain management. Having full visibility and control over your supply chain is critical. Companies that can harness the power of technology to track and monitor the various movements within their supply chains are better able to transfer higher costs from production. Apple’s success with its supply chain is a testament to what strong supply chain management practices can achieve, with the company enjoying a compound annual growth rate in excess of 16% on its stock price between September 2021 and February 2022.
Innovation and specialization. Companies that innovate and specialize often amass greater market share and competitive advantage from goods or service offerings that are unique in the marketplace. Efforts to deliver services or products that are at the leading edge of technological innovation and specialization often benefit from a clientele with low price sensitivity and relatively price inelastic levels of demand.
Staying on top of pricing trends is crucial for any C-suite executive. According to a recent Simon-Kucher & Partners study, 57% of respondents claimed they had felt higher price pressure in the last 12 months, with 64% stating that they were currently involved, either directly or indirectly, in a pricing war. A similar majority of respondents (68%) said they planned to increase prices in line with inflation in 2021.
With price taking on an ever-more crucial role in managing a company’s profit prospects, it’s vital that the C-suite in any industry stay on top of its pricing strategy. Front of mind should be a strategy that ensures pricing is adequately measured, monitored and communicated, both internally and externally. To formulate a strategy that meets these goals requires taking three steps:
With so much at stake for businesses across industry verticals, there has never been a more urgent time for the C-suite to get on top of its pricing strategy. Without knowledge of how pricing power can impact a company’s ability to pass on price increases, any executive who fails to acknowledge the role of pricing in their quest for profit may find themselves at a damaging loss.
Lovrenc Kessler is managing partner of Simon-Kucher & Partners.
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