DO WE INCREASE PRICES?
After years of calm, inflation has reared its head again. Industrial costs have increased and many companies are wondering whether to raise the prices of their products (if they haven’t already). They hold out for fear that the increase in prices will then be reflected in a decline in sales. Also in consideration of the fact that 2023 is being described by most as a year where there will be a slowdown in the economy on international markets.
Here are some reflections to help those who are still undecided.
6 POINTS FOR REFLECTION
There is no one-size-fits-all solution. Each company has its own cost structure and rather than listening to the advice of experts, it is better to “do your homework well”. Keeping in mind that:
- Inflation is also affecting our competitors; therefore, we are all in the same boat. However, it is important to be informed on how our competitors are behaving; especially the “head of the class”.
- Be careful not to increase the prices of all products without distinction! Companies that have a good cost control system should be able to know the input mix of various products and understand where and how much margins contract. This allows you to act on prices with targeted actions and not indiscriminately (if this cost control system doesn’t exist, here’s an opportunity to create one).
- Can we improve the efficiency of our processes? This is another question that should be asked. There are contributions for companies that invest in industry 4.0, for example.
- When a raise is decided, it is also important to communicate it correctly. If we are serious and reliable suppliers, we are fundamental resources for our customers. Our survival is therefore also “their business”.
- On the subject of communication, I highlight the case of a transport company who communicated the increase as temporary, not incorporating it into the price: “… extraordinary costs for which we are forced to ask for a temporary partial contribution from our customers in the amount of +€0.25 per shipment …”.
- Once again it emerges how important it is that the competitive advantages of our companies are not based too much on price. Price is certainly an important element, but the by now famous “value-proposition” must focus on other elements (product, quality, service, delivery times, etc.). If you have never done this analysis, here is your chance to do it; unexpected aspects are often discovered. In this regard, consult the Export Best Practice catalogue: Value Proposition Definition.
INFLATION AND MARKET MIX
We are talking about inflation, a phenomenon that is affecting not just the European economy, however, it is necessary to distinguish. In fact, there are two types of inflation: that caused by an increase in costs (of energy, transport, raw materials, etc.); and that caused by excess demand (i.e. when a lot of money in circulation fuels demand and therefore prices tend to rise).
The first is what the countries of the European Union are experiencing; the second is instead the inflation that the United States is experiencing.
It is clear that the countermeasures should also be different. Increasing the discount rate is certainly the right measure in the case of demand-pull inflation; because the increase in the cost of money cools the economy. However, it is not so in the case of cost-push inflation. The risk here is to depress the question even more. Increases in the discount rate in Europe therefore risk depressing an economy that is already sluggish.
We are at the end of the year and it is time to take stock. The last piece of advice is then to check the mix of markets in which we are present. The time may have come to invest in some markets where we are not yet present. Maybe outside of Europe.