One difference between the very successful companies and the less successful ones is the correct understanding and implementation of price management. Many companies and their management are afraid to adjust their prices to inflation or slightly above it. At the same time, however, they are annoyed by a decline in profitability over the years.
What is the fear factor of price increases in B2B and B2G?
It is always the same reason: “We risk losing customers to the competition by raising prices” This is the unanimous opinion of many of my clients in the industry. Two comments on this:
- No relevant customers are lost through justified price adjustments demanded by comprehensible price increases in the market environment. In my experience, customers with very meagre contribution margins are always the ones most likely to leave and look for the next cheapest. Let them go!
- A price increase inevitably brings them into the conversation with the customer – this just has to be used correctly. Appropriate preparation for the talks is indispensable for this. If this “homework” is worked through in detail, it leads to a deepening of the customer contact and essentially to a better understanding of the customer and his economic environment.
Why price increases are more important than cost-cutting measures
Price is the number one lever for influencing the profitability of a company in a cost-neutral way. A 1% increase in the sales price has a leverage effect of between 11 – 15 on earnings for manufacturing companies. In other words, an EBIT increase of 11-15%. No cost-cutting measure can even come close to achieving this, as the chart below illustrates.
What exactly is meant by price management?
The term price management refers to a very analytical and strategic task concerning the business model in the corresponding competitive environment. Once the company’s own positioning in the market with its strengths and weaknesses as well as the USPs (unique selling propositions) has been updated, the actual technical part begins. Price management is not rocket science, nothing completely new or innovative, but solid craftsmanship based on a wealth of experience.
Why is this instrument treated so stepmotherly?
First and foremost, in my experience, there is insecurity in dealing with prices. The fear of losing orders, turnover and customers to the competition prevails when dealing with price increases. These fears outweigh the great opportunities to increase profitability in steady, small steps over the years. Inflation is countered with cost-cutting programmes, possibly in order to lose customers through declining performance.
However, this concern is unfounded if management takes a detailed and up-to-date look at the market and customer needs. If possible, a price adjustment should be accompanied by additional services from which the majority of customers also derive added value.
