Pressure on prices is on the rise, innovation and value pricing key
Under current economic and market trends, 83% of companies suffer from increasing price pressure and margin erosion. Innovating their way out towards more product differentiation and digitalisation, through ambitious pricing strategies and new revenue model, is seen by managers as the best approach to deal with the matter. A company’s pricing strategy and capability can make or break the bottom line.
According to the 2016 edition of the ‘Global Pricing Study’, conducted by Simon-Kucher & Partners among 2,200 managers from businesses in over 40 countries and 25 industries, organisations across sectors are feeling what the researchers call an “alarming” level of downward pressure on prices. 82% of companies surveyed say that they are facing increasing price strains, with stronger competition with low-price suppliers highlighted as the main driver. Other key reasons cited are increasing negotiation power among customers, mainly the results of the professionalisation of procurement functions and the internationalisation of traders, and greater price transparency, for a large part due to digitisation and the continued rise of online channels.
“Comparing prices has never been easier, pushing internationally operating companies to create defendable price and discount structures across country borders”, comments Ruben de Lange, a Senior Consultant at Simon-Kucher & Partners.
The pressure in the market has over the years built so highly that today every second company (49%) notes that they are engaged in some form of a price war. A further 21% of managers state that there is a price war visible in their own industry, yet that they, to date, have refrained from mingling in with the battle, with ‘only’ 30% of managers earmarking their industry as immune to large scale price competition. Asked for who started the price war, 86% of the respondents point at their rivals.
On the back of the pricing challenges, companies are struggling with their margin targets – four out of ten companies failed to improve their margins over the previous year, for a large part because case prices have not been raised sufficiently to compensate for cost increases. Looking forward, the issue of bottom-line profitability is set to intensify as the improving economic climate is putting upwards pressure on costs. “The situation will worsen, since salary increases in many industries are leading to cost increases by up to three percent”, explains Georg Tacke, CEO of Simon-Kucher & Partners.
In a bid to deal with pricing pressures, respondents say that the introduction of new, innovative, or differentiated products (66%) – through innovation and/or product development – is the best strategy to follow. Although product innovation can definitely be effective, it at the same time is notoriously difficult to harvest. Although innovation spending continues to rise, reaching a record high last year, there is broad consensus among analysts that the return on investment of innovations remains to face a meagre track record. A large line of studies conclude that, across the board, more than half of programmes fail to realise the targets set in the business case. Simon-Kucher’s research finds that on average 72% of product innovations fail to achieve financial targets – incorporating pricing too late in the innovation process and not understanding the target segment needs are cited as the top two reasons for underperformance.
Other options mentioned to dodge pricing pressures include improving value communication (50%) and changing customers’ perception of value and price (49%). “It is crucial for organisations to understand customers’ value perception of their product or service. This may sound too obvious, but practice too often highlights that the value of products or services is derived from purely internal considerations”, says De Lange. The consultant advises pricing managers to turn to a range of more effective approaches, such as conjoint analysis, Van Westendorp, focus groups and/or customers interviews.
Interestingly the importance of cost cutting has declined vis a vis the previous edition of the research (37% versus 47% in 2014), according to the authors illustrating the sustained path of economy recovery the globe has seen in the past two years, and the fact that much of the high-impact cost savings that are relatively easy to implement, and hence reap, have already been explored.
The best and the rest
Based on an analysis of financial metrics of the studied businesses, the authors find that there is a large, and widening performance gap between the ‘best’ and the ‘rest’. Frontrunners in the pricing domain, a group estimated to amount to 13% of the total population, manage to book around a quarter (27%) higher profits compared to the rest (25% in 2014), while their track record in successfully launching and monetising innovations is also substantially better (+33%), a feat which also was the case two years previous.
Respondents recognise the competitive edge that can be gained from best practice pricing. In fact, most companies admit that they of late have invested too little in price management, while 87% of the participants indicate that there is considerable need for improvement regarding price strategy, price control, and supporting tools.
Executives should however not expect miracles, warns Tacke. He points at the fact that joining the ranks of the best, however strategic it may be, is likely to be a cumbersome journey. “The best are more professional in almost every area of pricing. Climbing the maturity level to the top typically requires three to five years of hard work.”
Best practice pricing
For those that do wish to bolster their pricing profile, the question is: what separates the wheat from the chaff? Tacke starts off by emphasising that leaders integrate their pricing strategies at the start of the product development process. Average performers commonly treat pricing as an afterthought in the innovation process. Robin Chu, a Manager at the consultancy, gives an example: “One out of five of the rest considers pricing only right at the product launch, when it is already too late for corrections and adjustments.” Involving pricing decision-makers – sales and marketing – early on is key, as it helps to evaluate the commercial feasibility of innovations and prioritise innovation projects according to monetisation value.
Another differentiator is the use of tailor-made pricing strategies and solutions, compared to using “off-the-shelf” practices. Frontrunners use tailor-made pricing support tools to actively manage prices almost twice as often as the rest, while only 13% of them make no use of advanced tools, compared to 33% for the average peer group. Leveraging their edge, leaders have a better understanding of pricing decisions as they create more transparency on the value they offer, making them better positioned to set the right prices for their products / services. The role of intelligence and data analytics, among others, herein is key – such techniques can be used to conduct (micro-)market segmentation, which in turn paves the way for differentiated propositions that can capture varying levels of willingness-to-pay and thus optimally monetise innovations. “No market has homogeneous needs. Understanding clients’ perception of pricing and applying ‘value pricing’ is paramount”, comments Tacke.
A third edge leaders demonstrate is their ability to anchor pricing in organisation and processes, right through from C-levels to the work floor. Best performers are more likely to have dedicated pricing teams, more likely to have clear roles and responsibilities in place and have a better process for management, monitoring and reporting.
Other differentiators that surface from Simon-Kucher’s study include a culture that supports a commercial mindset, a governance geared at profit instead of revenue, pricing ownership at an executive level and an organisation that provides continuity on the long term.
