Member Article

Companies struggled to rebalance pricing and profitability, post-recession

Companies across the UK are advised they need to move on from recession-driven, volume-at-all-costs pricing or risk long-term damage to their company’s revenues and profits, according to KPMG.

KPMG recently completed its 2013 UK pricing survey, which examines pricing trends across 200 of the UK’s biggest companies. Some of the key findings include:

• 70% of companies said ensuring their pricing maintains profitability is one of their biggest challenges, while 57% said maintaining control over pricing is an issue.
• 40% said they have sacrificed profit by reducing prices to win volume during the recession.
• 66% said they are unable to increase prices by 5% for at least the next 12 months.
• Over 70% believe they could increase profits by at least 5% through more effective pricing, and 40% believe they can generate at least a 10% profit improvement.

Robert Browne, partner in KPMG’s Strategy Group, commented: “The recession forced many companies to focus squarely on volume and fight for every point of market share against a backdrop of shrinking demand and a buyer’s market. After several years of this, companies have been conditioned to think of pricing simply as a lever to drive volume –that by lowering prices, volumes will increase or at the very least, be maintained. Whilst this strategy may have helped businesses survive the recession, it isn’t sustainable for the long term.”

He continued: “What’s particularly baffling is that companies do recognise that the size of the pricing prize is substantial. In our research this year, over 70 percent of companies said they could increase profits by at least five percent through more effective pricing and 40 percent believe they can generate at least a 10 percent profit improvement. These numbers are eye-watering, and represent very significant shareholder value. Yet pricing is still overlooked and underdeveloped as a capability for most companies.”

The stark impact of under-developed pricing strategies is best illustrated by the responses amongst companies within the food and beverage sector, where prices in some product categories have been reset permanently lower by relentless discounting and promoting.

Before the recession, discounts of 10 and 20 percent were commonplace and typically had a clear objective - for example to move older stock. However, now ‘3-for-2’ and ‘2-for-1’ offers have become so prevalent that shoppers will only buy on these terms. Indeed, according to KPMG’s research, 70 percent of companies in the food and beverage sector believe customers who have received discounts will be unwilling to spend more for the same in the future, and 40 percent said promotional wars during the recession have reset prices permanently lower.

Robert Browne said: “The harsh reality is that lower prices do not drive enough volume if everyone lowers their prices, or increase promotional discounts, at the same time.

“Worse still, there is clear evidence that food and beverage companies are promoting simultaneously across channels and retailers and so are, in effect, competing with themselves as much as with real competitors. This all points to companies who are struggling to break free from the volume-at-all-costs approach, despite signs of an improving economy and the potential to damage long-term revenues and profits.”

KPMG’s research found UK companies fall into two distinct pricing camps. Half of companies surveyed are investing in profit-driven, proactive, and value-based pricing. Yet the other half has not moved on from the more traditional share-driven, reactive and cost-based pricing.

Robert Browne commented: “Too many are still using the centuries-old cost-plus approach to pricing, and many simply use ‘intuition’ as opposed to data to inform pricing decisions. Most companies don’t have a single pricing role or function in their organisation, something that is in stark contrast to the investments that have been made in purchasing.”

KPMG predicts that within the next five years, or even sooner, sophisticated pricing analytics will transform pricing in the UK and other developed markets.

Robert Browne concluded: “I believe it’s inevitable that pricing analytics will be a critical capability for companies to mine their customer and transaction data as a means to optimise pricing and promotions. In the future, prices for some products may change based on the time of day, month or year, or even the weather. Rather than selling out of stock, retailers could adjust prices or remove promotions in real-time depending on demand. Consumers have already demonstrated they can accept these pricing strategies for travel and seasonal pricing strategies, particularly around Christmas, have been around for decades.”

This was posted in Bdaily's Members' News section by KPMG .