Industrial manufacturers are facing significant challenges due to the increasing prices of input factors. Our recent study shows that construction materials, chemicals, and base materials companies are not implementing price increases on a large enough scale to compensate for this lasting instability.
Prices of raw materials such as steel, wood, silicone products, acrylates, and resins have strongly increased since the start of the ongoing COVID-19 crisis. In the last six months alone, prices have gone up 50 to 100 percent. We recently conducted a study, which revealed that manufacturing companies attribute this primarily to a sharp rise in demand, stockpiling effects, and production capacities that have not yet been fully ramped up.
These price increases pose major challenges for companies in the construction, chemicals, and materials industries — and experts aren’t hopeful the situation will resolve itself quickly. Half of participants don’t expect prices to drop for at least another six to 12 months, and a third think prices will remain high permanently, or even rise.
For companies to successfully adapt and maintain their margins, they have to increase their prices to offset growing material costs . For example, if costs go up 15 percent (with raw materials accounting for 60 percent of cost of goods sold), net prices have to be raised nine percent to achieve the same gross margin rate.
Construction materials, chemicals, and base materials companies have not been able to successfully implement price adjustments
According to the study, however, companies aren’t taking the necessary measures to counter these sharp cost increases with higher selling prices. An alarming one-third of companies (36 percent) has not yet implemented price increases. While 18 percent of companies have at least announced that they’ll be raising their prices, another 12 percent are getting ready to.
64 percent have already adjusted their prices, but only 47 percent have managed to achieve more than 50 percent of their initial targeted increase. This means that at least half of the companies (53 percent) are failing to translate the sharply rising costs into their prices, which has negative consequences on earnings.
Inertness and price mechanisms explain the inability to impose higher prices
When asked what’s preventing them from raising prices, companies cite the sluggishness of the market. Nearly 60 percent of participants think that the industry is simply not used to short-term price increases, especially when there is one after another. Furthermore, according to 45 percent of respondents, customers find it difficult to pass on price increases in the value chain. However, more than 40 percent also believe that their own sales teams are undermining efforts to raise prices for fear of losing business.
For this reason, most companies start to up the odds internally for a successful price increase. 61 percent of participants focus on preparing and communicating concrete arguments for cost necessities in order to convince both their own salesforce and customers to adjust prices. 50 percent also differentiate higher prices according to product-specific cost increases, so they’re able to clearly communicate that they’re only making price adjustments where it’s absolutely necessary.
While companies are already on the right track, a successful price adjustment strategy is more complex. Developing a dynamic price management strategy, focusing on better planning and scenario techniques, and introducing sensible price mechanisms, such as surcharges or price escalation clauses, are all key to making successful price adjustments.
Get in touch with the authors:
Sebastian Strasmann
Jan Haemer
