How to make your company inflation-safe to secure margins

News about Singapore’s inflation, prices and cost increases make the headlines almost every day. The situation is clear: Inflation is here, it does erode profits and companies have to actively deal with it.

Inflation means price increases
Inflation causes a business’ costs to surge and it also depreciates an economy’s currency. Singapore experienced devaluation of approximately 35% in the last two decades.

Companies had to grow by the same rate to maintain their position in real terms. In periods of relatively stable prices, it was possible to compensate for cost increases with productivity gains. But that will be impossible in the future.

Inflation now reappears when economies are fighting against sluggish demand. The recent crisis has caused consumers to be more price-sensitive than ever.

Managers most urgently need to solve this complex situation quickly and make their firms inflation-safe. If a business doesn’t want to take a serious blow to its profits, then it will have to raise prices.

Five steps to secure margins
Increasing prices is not a one-time measure. It has to be done again and again. A process is needed that involves all relevant functions from marketing and pricing to sales, controlling and top management. A five step agenda helps managers to plan and implement price increases.

1. Target: Which prices should you strive for?

This area has a cost component (how much to increase) as well as a market component (how much can be achieved). Individualization by segments, products, and customers is much more successful than one fixed across-the-board price increase.

Check details and the duration of existing contracts. Modern contracts don’t include price information. At the most, the pricing part is an addendum that allows for changing prices without having to change the basic contract.

2. Instrument: Which price instruments can best implement the planned price increase?

Aside from list price increases there are many more options available. In B2C industries, package sizes can be reduced to avoid jumping over important pricing thresholds.

Other instruments include introducing surcharges, working on payment terms, or reducing discounts. Analyze every segment and decide from your company’s perspective on the best way in which to implement the planned price moves.

3. Preparation: How can you prepare the price increase in the best possible way?

Communication about price increases is important and necessary, and top management plays an important role in this phase. It also includes training and incentives.

Is the sales force capable of pushing through higher prices? What about incentives for the sales force?

4. Tactics: Which tactics should you apply when you ultimately raise prices?

Decide on the order: All customers at the same time? Or first the easy ones and then the “tough negotiators” later? Will you do it in person or by e-mail? What are fallback options if the implementation is tough or impossible? Are there less expensive alternatives? What are your walk-away prices?

5. Monitoring: How much did you really achieve in total?
On average, most companies only realize 53% of the originally planned price increase. Customers often receive “goodies” to at least partially compensate for higher prices: longer payment terms or additional discounts.

All elements have to be measured to quantify the real net-net effect of a price move. You do not need a controlling monster, but make sure that all effects are taken into account.
The companies that manage to fight inflation effectively will be tomorrow’s winners, as only they will have the means to invest in new products, offerings and know-how.

Dr. Jochen Krauss is the managing director of Simon-Kucher & Partners Singapore office. He specialises in developing market entry and pricing strategies and optimising pricing and promotions in the retail and financial services sector. Jochen can be reached at [email protected]