How to determine and increase pricing power

As companies recover from the impact that Covid-19 has had on their top line over the last two years, it is crucial for C-levels to be aware – and ideally, get ahead – of the trends that will likely drive the future of their commercial success.

The drive to achieve higher returns, manage new corporate tax introductions (9 per cent recently announced in the UAE), and keep up with inflation (6.5 per in Qatar in the last two years) have naturally led companies to hike up their prices.

This price increase trend is seen across most if not all industries, from oil price increasing by 44 per cent over the last six months to a 7.5 per cent increase on the price of Oreos. Multiple notable price increase announcements have also been made recently by CEOs in logistics (DHL), consumer goods (Mondelez, Kraft Heinz), luxury retail (Ralph Lauren) and telecom (Airtel).

The million-dollar questions for C-levels become: are those price increase numbers high enough from a business perspective? Should they be even higher? And most importantly, how can we get to such price increases? A key aspect for increasing prices is to understand your pricing power which translates to the company’s ability to raise prices without having to suffer from a decline in volume.

We see quite a few success factors that contribute to high pricing power. These include:

Brand value 
If you have a strong brand, you are able to increase your prices. As best put by the CEO of Ralph Lauren who expects to see 17 per cent price increases: “You’re bringing in a younger, higher value, less price sensitive consumer that is able to absorb that price.”

Control over your distribution chain
If you have control over your distribution chain, you are also very likely to successfully pass on any higher costs in your production. One such example is Apple, which has been able to achieve over 16 per cent CAGR on stock price between September 2021 and February this year.

Innovation and specialisation
Innovation and specialisation are quite key to determine your pricing power. For example, the pharmaceutical industry that has typically a lot of patents has been very successfully implementing price increases and continues to do so.

In a study we conducted to understand the experience of companies in the area of pricing, 57 per cent of the participating companies confirmed that they have indeed felt a higher price pressure in the last 12 months, while only 37 per cent of respondents said they were not involved directly or indirectly in a pricing war. The study revealed that the majority of companies (68 per cent) plan to increase price at most in line with inflation in 2021, confirming the undervaluation of price as a profit lever.

This is why it is important that C-levels stay involved in pricing decisions. It’s important to have pricing on top of your management agenda, but also measure it, monitor it and communicate it externally and internally.

External communication will be key so that the expectations of the customers and competition can be anticipated, while effective internal communication will ensure that there is no confusion and that everybody is pulling on the same street.

To conclude, an effective way of alleviating the pressure on your margins would be to apply a simple framework that starts with a clearly formulated pricing strategy, which sets out the direction to manage price priorities and market dynamics.

The second thing is then identification of your value drivers. Ensuring that you have the optimum product prices before going into execution.

Finally, the encompassing key lever is price governance, which provides structure and ensures control so that all these steps are taken seriously and are also being followed diligently.

Lovrenc Kessler is the managing partner, and Ahmad Sharaf Aldine is manager at Simon-Kucher & Partners Middle East