Companies in the price war: Seven strategic measures

The latest national consumer price index reports falling inflation: In Switzerland, shopping - for clothes and shoes, for example - became cheaper again last month, by 0.4 percent. While consumers are happy about this, companies have nothing to smile about, as the latest Global Pricing Study by the consulting firm Simon Kucher & Partners shows: Eight out of ten companies complain about increasing price pressure across all industries. A large proportion (49 percent) even see themselves in a price war. This is the result of a survey of around 2,200 managers from leading positions in companies from all sectors in more than 40 countries.

Margin declines further in 2016

The most important reason cited by respondents for the increased price pressure is the stronger competition from low-price suppliers and the greater bargaining power of customers. As a result, it is currently very difficult to improve profit margins. Only six out of ten companies in the study say they have increased their margins compared to the previous year. "The problem will continue to get worse, because wage increases are leading to cost increases of up to three percent in many industries," says Dr. Georg Tacke, CEO at Simon-Kucher & Partners, "which continues to eat away at profits." German companies, for example, are talking about a 0.7 percent decline in margins.

The most successful companies are also more professional in pricing

Against this background, most companies admit that they have invested too little in their price management to date. 87 percent of respondents see a significant need for improvement in price strategy, price control and the supporting tools. The 'best performers' in the Global Pricing Study, which include 13 percent of the companies, show that this is definitely worthwhile. By investing in their price management, they are in a much better position than their competitors. In terms of EBITDA margin, their profits are around a quarter (27 percent) higher than those of the 'rest'.Tacke comments: "Such figures do not come by chance. The best are more professional in almost all pricing areas. For example, they organize regular price increases as cross-functional projects. As a result, the price enforcement rate is 38 percent higher than for the 'rest'."

New products and better value communication to counter price pressure

The good news: According to the study, almost all companies - not just the best - have now recognized that they need to systematically defend themselves against increasing price pressure. Two-thirds of companies (66 percent) are focusing on new products to escape price pressure. For half of all respondents (50 percent), improved product value communication is the most appropriate option. "These are important first steps. But it will take three to five years of hard work to reach the level of the best," Tacke knows.

Seven immediate measures at the strategic level

As a consequence of the survey results, the study authors recommend seven strategic measures that executives and managers can apply to escape price pressure and increase profits: 

1. Priorities: Make price strategy and management your top priority: No price cuts without detailed review
2. Ambition: Set more ambitious price targets
3. Tailor-made price management: Develop specific pricing strategies instead of relying on standard solutions
4. Incentives: Price increases often entail sales risks and vice versa. Make sure that your incentive systems reward positive price development in addition to sales.
5. Employees & Organization: Invest in building a pricing department and pricing competencies, define roles and responsibilities in the pricing process
6. Leadership: Put pricing strategy decisions on the agenda of board meetings on a regular basis.
7. "Digital-ready: Check whether your pricing model is ready for the digital age

Source: Simon Kucher & Partner