Price pressure: Companies worldwide lose 25% of profits on battling price wars

And 83% of managers blame their competitors for triggering the price wars.

According to a release by global consulting firm Simon-Kucher & Partners, 65 percent of companies are not able to charge the prices they deserve for the value their products and services deliver. As a result, they lose 25 percent of profits. Rather than focusing on profit, 46 percent of the companies fight price wars to gain volume and market share. And when companies finally bring themselves to raise prices, they only get half of what they planned. These are the key findings of the Global Pricing Study 2011* conducted by global strategy and marketing consultancy Simon-Kucher & Partners.

The pricing experts surveyed more than 3,900 high-level decision makers from all major service and manufacturing industries about their profit culture, pricing power, the profit outlook and how they protect themselves from inflation risk. Almost half of the respondents from Europe, the US and Asia are from companies with more than one billion euros in sales; C-level executives account for one-third of the respondents.

The study results show that companies underestimate the inflation threat and are badly prepared when they need to increase prices. But inflation is inevitable. "To secure profits, managers need to make their company inflation-safe. Using the inflation rate as a benchmark for the price increase target is in most cases the wrong strategy," says Dr. Georg Tacke, CEO of Simon-Kucher & Partners.

Pricing power untapped
Pricing power is the ability of companies to get the market prices they deserve for the value they deliver to customers. Only one-third has sufficient pricing power and knows how to turn value into money. The remaining 65 percent of companies admit having only very little or no pricing power, which is why it’s clear from the beginning that the target price cannot be achieved. The weak performance is costly. It cuts profits by one-quarter.

Industries and countries differ considerably in this regard: chemicals (14 percent) and transport & logistics (19 percent) have the lowest pricing power. "The primary drivers for high pricing power are customer value and brand," explains pricing expert Tacke. "Every company has the ability to achieve high pricing power. If a company can offer its customers real value and communicates that through a top brand, this will translate into money." Companies that excuse weak performance by blaming competitors are deceiving themselves.

Price wars continue
46 percent of companies are still engaged in price wars. The vast majority of managers (83 percent) blame their competitor for triggering it ? although statistically that’s not possible. Leading the country comparison with 84 percent, Japan is by far the most militant price war market, followed by Italy (69 percent) and Spain (65 percent). "Managers need to strive for profit, not for market share. Price is the strongest profit driver," says David Vidal, director at Simon-Kucher & Partners and co-author of the study.

Inflation threat underestimated
Pricing is a topic that has always been neglected by many companies. With inflation around the corner, they will pay the consequences: The survey findings reveal that the vast majority of companies are only able to get half of the target price increase. Only 36 percent of companies achieve at least three-quarters of their originally planned price increase. The telecommunications industry (25 percent) is clearly below average, but the US (31 percent) is also weak when it comes to price implementation.

Lacking experience, managers use the inflation rate as a benchmark for price increase targets. 68 percent of managers plan to increase prices below or in line with inflation rates. "It’s fatal to use the inflation rate as a benchmark when you take into account that the majority of companies are weak in price implementation. This won’t be enough. They’ll probably end up paying the difference," concludes Georg Tacke. Only the construction, industrial goods and transport & logistic industries plan to increase prices above the inflation rate.

To cope with the inflation risk, pricing know-how differentiates the smart companies from the low performers. The study results reveal the formula for success: The better the pricing know-how, the higher the pricing power, the higher the profits. At least 25 percent higher profits are proof enough.