Last chance to switch to "crisis mode"
We are in the midst of the energy crisis, watching prices skyrocket and the recession is already upon us. In this toxic environment, it is important that all executives take the situation very seriously and develop a sense of urgency in implementing their own actions and counter strategies. The much quoted "Sense of Urgency" is just as important as the realization that cries for help to politicians will not be enough. Capping energy costs, as was recently decided, will certainly make life a little easier for many companies. But to get through this crisis reasonably well, measures must be taken in all areas of the company and implemented at all levels. Sales and the passing on of increased costs via the price have a central role to play here.
Passing on increased costs and the role of sales and marketing
The resistance price increases are up against is enormous. This is so both in B2B business and in consumer markets. At the same time, survival depends to a large extent on the ability to pass on increased costs by prompt and appropriate pricing. The speed and consistency with which increased costs are passed on to the market are decisive factors for determining just how much room for maneuvering a company can develop.
It should be noted that the options and promising strategies vary according to the industry and the stage of the value chain. It would be a mistake, however, to base the success of cost pass-through on maintaining the gross profit margin across all industries. This approach is flawed for several reasons. Why?
- On the one hand, this approach suggests that passing on costs at a ratio of 1:1 would lead to the gross profit margin being maintained. But it does not: Often, costs can only be passed on with a time lag.
- On the other hand, the possibilities of passing on costs within an existing customer structure are usually very different. Typically, there are some customer segments where increased costs can be passed on less easily than in others.
Both facts show that it is not enough to pass on increased costs on a 1:1 basis. In order to achieve the same gross profit margin, they must be passed on at a premium.
Do not 'bluntly' convert cost increases into price increases
There is no silver bullet for successful pricing in times of crisis. The requirements of individual industries are too different for that. And in the end, it is always the individual customer relationship that decides on possible approaches and methods. Nevertheless, as a rule, the aim is always to avoid 'blunt' price increases and to replace them with price differentiation and changes in the scope of products and services.
Promising pricing models
So-called "kits" refer to the offering of several products (bundling) at a preferential price. Current examples are "blackout kits". These are emergency packages designed to equip for possible power outages. In B2B supply relationships, price escalator clauses are proving to be a particularly useful tool: they make the expected cost and price increases transparent and digestible for both sides. In principle, it is also important to use psychological price thresholds in times of crisis: Here, the combination of discounts (holistic condition system) opens up additional scope. In retail, dynamic pricing models in particular offer a good opportunity to address variable demand structures intelligently.
Cost pass-throughs are important. However, they will not be enough alone.
Customers generally have fixed budgets and consumers have fixed household incomes. In addition, at the consumer level, the savings rate is rising and demand for industrial products and services is declining. It can therefore often be observed that successful price implementation is only possible if quantity concessions are made in return. As a consequence, companies with the same or even improved gross profit margin generate less gross profit. If no measures are taken to improve the expense items below the gross profit, the bottom line deteriorates - possibly even to the point of making a loss. Of course, one might be inclined to think reflexively that sales would have to "step it up a notch". However, this seems rather unrealistic in the current tense situation. All areas of the company must participate in overcoming the crisis. The passing on of increased costs must be accompanied by cost reductions in all areas. If the conditions are met, personnel costs could continue to be reduced through government programs such as short-time working allowance (KUG). But it would be wrong and unwise to rely solely on this. It is also a harsh fact that companies often have to reduce their number of employees. To do this, all services in overhead and core processes must be scrutinized.
Fast-acting cost reductions can be achieved, among other things, by reducing services, such as waivers, scope and service levels, and by increasing efficiency through simplification, standardization and adaptation of management structures. The relocation of tasks to countries with more favorable factor costs is also a viable option - especially for companies that already maintain operating facilities there. Of course, other operating expenses should also be put under the microscope. In the short term, costs for office supplies and outside services, including cleaning, repairs, vehicle costs, advertising expenses, entertainment and gifts, donations and gratuities can be reduced.
Making the right decisions is important, but it's the execution that counts
Making decisions quickly and consistently is now essential. However, doing this alone will not be enough. A sad finding from more than 25 years of implementation-oriented management consulting is that more than 80 percent of all action programs are not implemented or not fully implemented. All too often, people trust that the decision to implement measures will also produce the desired effects. This is by far the most important reason why many strategies do not bring the desired success. The professional implementation of decisions is at least as important as making the right decision itself. Especially in the current, overall economic situation, because - as sad as it is, as dramatic it is - many companies will not get a second chance after a failed implementation.
General conditions for successful implementation
Successful implementations are not "witchcraft". Just taking three simple building blocks into account significantly increases the probability of success in realizing the desired effects through the implementation of decisions:
- Implementation is a matter for the boss. Even if CEOs cannot take care of all implementation-related issues themselves, they must be in the "driver seat." Successful companies set up staff departments to support their CEOs, for example, to ensure that the implementation of measures - in addition to day-to-day business - receives sufficient focus.
- Implementation progress and expected effects must be measurable. Complex issues of decisions made must be broken down into smaller, measurable work steps in a way that is comprehensible. The definition of implementation evidence takes place at this level and is an important building block for progress monitoring. It is also important to record the expected effects in a qualified manner via their value drivers and quantity structures. This creates the prerequisites for implementation controlling (point 3.).
- The progress of implementation and the degree to which the effects have been realized must be checked regularly. Only rarely do implementations work 100% according to plan. It is therefore important to identify any deviations and their consequences. Only then can countermeasures be taken in time. Progress and effect controlling are absolutely necessary instruments to lead implementations to success.
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Even if the question of passing on prices sounds trivial, this is not the fact per se. If only because price and quantity effects have to be considered simultaneously. This is particularly the case when companies work with complex order structures that change in relation to each other, leaving them faced with special challenges. Moreover, the current challenges will not be solved by pricing alone. Companies need to act quickly, boldly and decisively at all levels. This includes personnel and non-personnel cost reductions. A structured approach will help them to quickly and decisively identify which measures need to be taken and which areas of the company need to make which contributions so that the company's goals can largely be achieved.
What are the questions that concern you in the current situation? We support you in facing the special challenges of this time. Please do not hesitate to contact us. We look forward to hearing from you.