As brands struggle with consumer push back from price increases, an industry leader reveals three common mistakes and sheds light on the secrets to booming sales after a price increase.
Despite increasingly tough global market conditions placing mounting pressure on retailers to lift prices, the majority of companies fail to achieve their target price increases, an industry expert says.
According to Kai Bandilla, managing partner in France of Simon-Kucher and Partners, a global pricing consultancy, despite global pressures to lift prices, the majority of retailers respond incorrectly to rising price pressures, ultimately leading to plummeting prices and dwindling sales.
But addressing the three most common mistakes retailers make when faced with rising price pressure can help brands boost profit margins, according to Mr Bandilla.
- Spreading the peanut butter
The first commonly made mistake by retailers is the concentration of prices across different products, Mr Bandilla says.
Retailers need to make sure they spread their price increase evenly across the product portfolio, he says, by, for example lifting prices by 5% across all SKUs.
“The key advantages of this “peanut butter” move is that it is easy to do the math and easy to communicate internally and externally. Unfortunately, not all your products are created equal. Surgically increasing your prices by studying the pricing power within your portfolio is critical,” he says.
Taking on this strategy saw one of his clients end up with $10 million profit, but the journey wasn’t always easy.
“The key disadvantage of surgical price increases is that it is hard work. It took weeks of crunching massive historical sales data series to uncover the sweet spots with high pricing power,” he says.
- Cutting costs when you think you can’t raise prices
Retailers should also avoid cutting costs merely because they think they can’t increase prices, Mr Bandilla says.
Cost cutting is not a sustainable solution to weak top line growth, he argues, as it cannot continue indefinitely because the benefits will eventually fade.
“Making matters worse, the loss of human capital due to downsizing can cause a further loss in competitiveness in innovation and eventually, sales. The solution must involve increasing perceived value, not just cutting costs. This leads to the third mistake,” he says.
- Taking your eye off of value
Finally, retailers need to ensure that they’re not undertaking valuation too late in the process, according to Mr Bandilla.
According to research conducted by Simon-Kucher and Partners, 77% of executives cited “introducing new, innovative, or differentiated products” as a requirement to deal with increasing price pressure. However, 72% of all new products flop.
“Why?,” Mr Bandilla asks, “It’s often because companies neglect or ignore key pricing and marketing activities until it’s too late. They don’t have their eye on value right from the beginning of the product development process,” he says.
Intervening early is the key, Mr Bandilla says, because the share of a successful product launch doubles when a company takes pricing into account from the start of the product development process through to the launch.