When price increases reach their limit, manufacturers need to find other ways to achieve fair compensation. List price and trade terms rebalancing could be the only way to offset rising costs and maintain profitability. And with negotiations imminent, there’s no time to lose.
One of the biggest challenges you face as a manufacturer today is maintaining profitability in the face of rising costs. Increased labor costs, transportation expenses, and other operational costs are all putting pressure on your margins. In our Unlocking Growth in Times of Uncertainty Study 2023, more than 50 percent of B2B companies stated cost pressure as their main concern.
Naturally, as a manufacturer you want to avoid absorbing the full impact of cost increases. You may have chosen to pass some or all of the cost burden onto your customers, e.g., by raising the list prices of your products. Meanwhile, your customers need to maintain their own profit margins.
So far, these increases have been reflected in higher retail prices. But the sun is about to set on that story.
Manufacturers confronted from all sides
The permanent cost pressure is only one part of the equation. Now, retailers are demanding net price reductions due to the current decreases in raw material prices. End customers are also reaching their limits. In our survey, we found that 28 percent of all consumers will reduce their spending budget in 2023.
The system has been pumped up with pricing and there is only so much more it can take. To be prepared for the next round of negotiations, you need to revisit the basics.
Your next negotiations: Secure favorable terms that compensate for cost pressure
There is a way to achieve negotiation outcomes that benefit both parties. You need to modify the terms of agreements to ensure fairness and align with the evolving dynamics. With the next round of negotiations around the corner, an immediate executable approach is a must!
We recommend harnessing the combined power of two valuable mechanisms:
- Folding
- Conditionality
Folding: Relationships that reward both manufacturers and retailers
In light of current market conditions, price adjustments may be essential to maintain competitiveness Cutting list prices and proportionally rebalancing the discounts can benefit both the manufacturer and the retailers in terms of increased sales while helping retailers leverage better shelf prices.
Key questions here include:
- What is the relationship with retailers and how will they respond to the price adjustments? Are they willing to cooperate and adjust their shelf prices accordingly?
- How will folding affect your profit margins? Will the reduction in list prices be compensated by increased sales volume or improved margins in other areas?
- What will be the long-term impact of folding on your brand image and perception? Will it create pricing expectations that may be challenging to sustain in the future?
Trade term conditionality: Targets that are both implemented and achievable
As a manufacturer, you must ensure that your investments and support are tied to the desired outcomes or behaviors. The next step is to review the actions or milestones that you agreed with your customers must meet to receive these benefits.
If you have set specific conditions for retailers to qualify for trade allowances, cooperative marketing funds, or volume discounts, then you need control and transparency to ensure these resources are effectively utilizedpush as many unconditional elements as possible into conditional ones.
Key questions here include:
- When was the last time you looked at your volume discounts? Are you incentivizing larger orders and securing increased revenue?
- Are your customers providing accurate sales data, implementing your merchandising standards, and maintaining the right inventory levels?
- Do these targets align with the current market conditions, or do you need to adjust the targets to foster better collaboration, optimize your investments, and align retailer activities with your overall business objectives?
How we can help
Yes, you need to act fast and react to the current market. Your next round of negotiations needs to deliver instant results. But you also need to pave the way for future opportunities and long-term sustainable growth. It’s crucial that your negotiated terms allow you to distribute the burden of rising costs while maintaining mutually beneficial relationships with your retail partners. Only through collaborative and forward-looking business plans can you mitigate the impact of both today’s and tomorrow’s challenges.
We can help you create a win-win scenario where both parties benefit from increased sales, market share, and business success.
At Simon-Kucher, our experienced consumer products consultants help companies to navigate these challenges and boost growth. From pricing to promotion, product to placement. We understand the consumer products industry and its pricing, sales, and distribution hurdles.
Reach out to Bjoern Dahmen or Francesco Fiorese to start preparing your negotiations today!
Read the case study:How do you optimize promotional efficiency to increase sales and profit in a competitive FMCG market
Read more:
Unlocking growth in times of uncertainty
Offset consumer uncertainty with a robust promotion strategy
