After many years of low inflation, prices are beginning to rise in Ireland and elsewhere. The Irish Consumer Price Index rose to 1.7pc for the year to May 2021, a figure that is in line with the rising rates reported in the EU, UK and US. Clearly, a period of faster price increases is coming.
However, after enjoying low inflation for many years, many companies are unprepared for the commercial implications, leaving them vulnerable both in the short and long term.
Enterprise Ireland recently partnered with international pricing and strategy consultancy Simon-Kucher & Partners to survey Enterprise Ireland client companies on pricing strategy. This is the first multi-sectoral pricing survey of Irish companies, and the results were compared with the global averages from Simon-Kucher & Partners’ Global Pricing Study 2021.
The study involved a survey of nearly 500 Enterprise Ireland client companies covering 12 industries. The sample included respondents across the top- and middle-management positions in a range of B2B and B2C industries.
The results confirmed what we have been hearing from companies since the final months of 2020. Rising costs and inflationary pressure, as well as the need to fund innovation to ensure the long-term success of their company, have made developing a robust pricing strategy a priority for Irish exporters.
But after years of low inflation, many businesses may now lack the experience, confidence or skillset to implement price rises
According to the survey, Irish exporters have shown remarkable resilience through the challenges posed by both Brexit and Covid-19, with 54pc of companies reporting improving profits in 2020, comparing well with the global average of 59pc.
But with volume gain consistently identified as the key profit driver and only 8pc predicting that these improvements in profits will be sustainable in the long term, any profit gains are highly vulnerable to the impact of inflation rises.
Irish exporters also have to contend with the rise of input costs and wage inflation resulting from the continuing fight to attract and retain talent. Profit margins, therefore, are under tremendous strain.
The survey also revealed that 71pc of respondents planned a price increase in 2021, with 35pc of respondents targeting price increases above the inflation rate and 34pc planning a price increase in line with inflation.
But the average realisation rate for price increases was 21pc, which means that a company trying to raise prices by 2pc would only achieve around a 0.4pc increase on average. This puts many companies at risk of significant margin erosion.
Price is the strongest profit lever for companies ahead of cost control and increases in sales volume. These results clearly show that Irish exporters need to develop a sustainable pricing strategy.
However, after a prolonged period of low inflation, pricing strategy had fallen down the list of priorities. Many companies may not now have the necessary skills in price management.
With inflation rising quickly globally, it is imperative for Irish exporters to increase their skills in pricing strategy — and fast. Not only is this important to protect profit margins, it is also needed to future-proof the business by giving them the resources to invest in important functions such as research and development and sales and marketing activities.
In a recent webinar Mark Billige, CEO of Simon-Kucher & Partners, shared a process for exporters to adopt in implementing price increases. Enterprise Ireland also invited him to outline how to achieve pricing excellence. Links to these webinars can be found on the globalambition.ie/uk page.