Nearly two-thirds of Australian businesses intend to put up their prices in the next 12 months to boost profits – yet most admit it will be difficult to achieve the material price increases they want for at least another year. Companies on average achieve just over half of their intended price hikes, a KPMG Australia study has revealed.
The Australian Pricing Survey 2015, which covers 161 companies across a range of sectors, shows that, on average, businesses felt they could increase their profit levels by 10 percent with more effective pricing. But with nearly three-quarters of companies reporting price pressures in their industry and over half (57 percent) believing they were caught in a price war, on average Australian businesses were able to realise just over half (55 percent) their chosen price increases.
The survey revealed that just 13 percent had formally reviewed their pricing strategies in the last two years. Nearly a third of senior managers did not have pricing as a top priority, while almost half were unclear who exactly was responsible for setting and managing prices in their companies.
Ronan Gilhawley, KPMG Australia Partner in Charge of Strategy, said: “This report is a first-in-kind study of pricing effectiveness and margin performance among Australian companies and it has some revealing findings. Given the current competitive pressures on all businesses, it was surprising and a little alarming that so few had properly reviewed their pricing strategies over the past two years. This compares with 37 percent in our recent study in the UK and suggests that pricing in the Australian market is less mature than other developed economies.”
He added: “The lack of prioritisation and clarity internally over responsibilities in this key area is perplexing. It really should be on the C-suite agenda, and in fact those that do, tend to enjoy higher average margins than others. That 10% extra profit opportunity, which on average, companies felt they could be achieving, seems eminently reasonable. But it will only come about if they approach pricing in a much more strategic approach.”
Ronan Gilhawley said: “To be fair to Australian businesses, the pressure on prices has been very noticeable over the past two years. After five years of cost-cutting, post-GFC, organisations have found themselves with nowhere else to go. It takes business confidence to pursue an alternative pricing strategy and that is thin on the ground here at present. Customers have been seeking ever-larger discounts and there have also been new lower cost-entrants, or disruptors, in many markets and this has increased the pressure on margins.”
Pricing strategies, the report showed, covered a variety of intended outcomes. The most popular (55 percent) driver was to maintain profitability. The next most common were: defining customer solutions and pricing them effectively; ensuring cost increases were passed on to customers; and getting paid appropriately for the value enjoyed by customers for the goods or services. The fifth biggest driver was to maintain control over pricing. These mirrored an earlier study by KPMG UK on pricing imperatives there.
Ronan Gilhawley said: “Companies really need to get to a situation where customer value is driving their pricing. This is a much more sophisticated approach and businesses which do this consistently enjoy much higher margins than by using the traditional ‘cost-plus’ basis , or a pricing approach based on what competitors are doing. These approaches, which fail to set price based on what the customer really values, leave a potentially huge gap in profitability potential. While 14 percent said they were moving to a value-based approach in the next two years, we’d like to see that as a much higher figure”.
He added: “The fact that 83 percent of respondents believed they enjoyed above average or average profits in their sectors shows there is a subjective rather than objective approach being taken in many cases. A key challenge for companies is to get a robust evidence-based understanding of their own and the market’s pricing performance. Only between 30-60 percent of intended price rises are actually sticking. This suggests a lack of targeting to those customers who will pay extra for value. Data and analytics has a crucial role to play here. And an often reluctant salesforce needs to be given the tools, support and incentive to realise those intended price increases.”
Senior Communications Manager, KPMG Australia
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