Supply chain disruptions, rising energy costs, and increased consumer demand is driving inflation to levels not seen in decades. However, even after months of increases, many companies are struggling to respond effectively to the situation. To learn more about their perspective, we undertook a global Inflation Pricing Study.

Consumer and energy prices continue to surge, keeping inflation around the globe at a historic high. As the Organization for Economic Co-operation and Development reported in April, year-on-year inflation in the OECD area rose to 7.7 percent in February, the highest it has been since December 1990. By comparison, reported rates across the bloc were 7.2 percent in January, and just 1.7 percent last February. These numbers are expected to climb, given the ongoing war in Ukraine and increased global volatility.

Amid this uncertainty, the OECD estimates global economic growth will be more than 1 percent lower this year due to the conflict. Inflation, already high at the start of the year, could rise by a further 2.5 percent on aggregate across the world. While UAE inflation rates — at 2.5 percent in 2021 — are below global levels, we have still seen an increase of 458 basis points over the last year.

This is bad news for consumers and companies alike, who are struggling. To find out more about the specific expectations and viewpoints of firms, we surveyed more than 3,000 companies across 20 countries.

What were the key results? Many companies are aware of the gravity of the situation — roughly a third expect costs to rise by more than 6 percent at or above today’s inflation level. And while the majority of company decision-makers see price increases as the most important measure to counter the rising costs caused by inflation, one-third of all firms surveyed have neither implemented nor planned price increases.

The reason for that is the fear of high-volume losses due to price increases — almost 70 percent of firms admit to that. But what these firms do not realize, is that if they conduct their price increases with a clear objective and a differentiated approach, risks like these can be minimized. Since roughly 30 percent of companies carry out price increases evenly across all customers and do not differentiate between them, there is still enormous room for improvement.

Inflation, already high at the start of the year, could rise by a further 2.5 percent on aggregate across the world.

Lovrenc Kessler

How can companies prepare for price inflation, and improve their pricing capabilities? Given the typically low inflation levels over recent years, many companies stepped back from consistent investment in pricing excellence. This has come back to haunt them now, as inefficient price increases can cause significant margin erosion. But how can a company increase their prices to offset inflation without breaking contracts, increasing churn, or damaging its reputation?

As pricing experts, we developed a nine-step approach for companies to create a workable price increase process.

First, firms need to carry out a contract inventory. This means reviewing existing contracts and identifying touchable revenue. Managers will have to establish when and how often prices will rise, per product and per contract.

Second, companies will need to analyze data on cost development and price potential, while only considering relevant revenues. These targets need to be agreed among c-suite executive managers in the business.

Third, managers should differentiate customers, segments, products and channels, mainly based on ease of increase, and less on current profitability.

After this work is done, firms need to prepare to implement these changes.

The fourth thing firms should do is develop alternative pricing models, price clauses, and less expensive alternatives. They must also define clear approval rules in case of exemptions from these targets. 

Fifth, the business should reward staff for carrying out successful price increases, on top of existing compensation plans.

Sixth, c-suite level executive managers should explain the firm’s ambitions internally and externally. They should develop sales guidelines and train appropriate price negotiation skills, which must include mock negotiations.

The business is then ready to roll outs its new pricing structure.

Seventh, firms should prepare supporting material, such as battle cards, concession rates and negotiation plans account by account, or product by product. 

Eighth, relevant key performance indicators should be developed — including a roadmap for the timing of negotiations — to allow for meaningful monitoring.

Finally, real-time monitoring should be established to track progress, process, results and compliance. The business should be ready to react accordingly in case of deviations from its plans.

• Lovrenc Kessler is managing director of consultancy Simon-Kucher & Partners