Bold pricing decisions that SMEs need for strategic growth
The past 2 years have seen dramatic price increases in response to the pressures of COVID-19. A number of companies have boosted prices in response to pressure to achieve higher financial returns, manage new corporate tax policies (9 percent in the UAE announced recently), and keep up with inflation (6.5 percent in Qatar in the past two years).
There has been a resurgence of price increases announced recently by CEOs of consumer products, luxury retailers, and even telecom companies. From oil prices rising by 44 percent to other commodities increasing 7.5 percent over the past six months, this price increase trend is evident across the board.
For larger companies, increasing product prices might be a straightforward process. But for SMEs who are trying to stay afloat, there needs to be a much greater awareness of the trends that will likely drive their companies' success in the future. They need to figure out how much to increase prices in a way that’s sustainable to the business but also explore how to arrive at them without suffering a shortage in sales.
This has everything to do with their current foothold in their market. Do you have market power? CEOs and C-Suites can determine whether they can raise prices above marginal costs without experiencing a decrease in volume by understanding their market power.
Here is what we suggest needs to be considered.
Be open and honest with your customers
Consumers may become loyal to a brand when they see value in it. However, the strength of its value can be measured by the level of a company's ethics and how it proves its honesty to customers. The Times recently found that SMEs being honest about price increases to customers honored the authenticity of their brands whilst educating them in a way that allowed them to understand these changes were being made globally.
This can influence brand loyalty and make you stand out within a market riddled with price fluctuations as demand exceeds supply. It might also discourage other companies from entering the market, protecting the brand’s own market share. Notable price increases have been announced recently by CEOs of consumer products like Mondelez, Kraft Heinz, and luxury retailers such as Ralph Lauren. They might be able to get away with tactics such as reducing the number of products whilst keeping the same price without losing their devoted customers. SMEs taking an honest stance to price increases might be able to counter the anticipated depletion in sales.
Supply chain control
Manufacturers face continual disruptions around the globe, adding costs and challenging their ability to adapt. A recent survey of 481 SMEs found that 47 percent of respondents said that supply chain delays have forced them to raise prices. Deloitte has found systemwide complications from high demand, rising costs of raw materials and freight, and slow deliveries in the United States, according to Purchasing Manager reports. Higher prices are likely to be passed on to the customer as supply outpaces demand. The ability to control your distribution chain will also make it much easier to pass on any higher costs in production.
Drive technological innovation
Customers - particularly early adopters - are willing to pay a premium over competitive products if new products are driven by industry-specific innovation. There’s added value in knowing products have been enhanced by the latest technology. Smaller retailers for example could take a lesson from coffee giant Starbucks, who very recently announced a new strategy that involves moves including allowing customers to self-order using an app or a kiosk in the store. Use technology to solve customer pain points that can be feasibly applied when expanding the number of physical stores.
We know pricing is the key to success in 2022. The marketplace is leveling out within the "new normal," but now is the time to act in order to alleviate pressure on margins and solidify market power for C-Suites.
Simon-Kucher & Partners carried out a recent study that explored the experiences of companies in the area of pricing. A mere 37 percent of respondents said they had not participated directly or indirectly in a pricing war, yet 57 percent of participants confirmed that price pressure has increased in the last year. It also showed 68 percent of companies plan to increase prices at most in line with inflation in 2021, which is consistent with the fact that price is undervalued as a lever of profit.
Implementing a straightforward pricing strategy allows you to create a clear vision for how to manage price priorities and market dynamics. During this phase, you can analyze competition and take note of aspects like the promises they make to customers, their level of upgrades and levels of products, as well as any claims they use to differentiate. Then you can identify your value drivers to ensure you have the optimum product prices before going into execution. As a final step, you can establish price governance to ensure both structure and control when diligently implementing this framework.
The importance of measuring, monitoring, and communicating pricing need to be at the top of your management agenda. And it’s also more straightforward to do than one might expect. Keeping in touch with customers and competitors helps anticipate customer expectations, while internal communications ensure that there is no confusion and everyone is on the same page.
About the authors
Lovrenc Kessler is Managing Partner of Simon-Kucher & Partners Middle East. Ahmad Sharaf Aldine is a Manager at Simon-Kucher & Partners Middle East. Simon-Kucher & Partners is a global consulting firm with more than 1,600 professionals in 42 offices worldwide focusing on TopLine Power.