For a company like Ciba, with almost 10,000 individual products, it’s crucial to differentiate price changes for different products. Consultants at SKP point out that prices on niche products, for example, can be increased at a greater proportion relative to input costs with little impact on volumes. On the other hand, large price increases are not advisable for products that can easily be bought from competitors, something that companies understand intuitively but often do little about.
To address this at Ciba, there’s a steady flow of information between finance, operations, procurement and sales, analysing costs and prices on a product-by-product basis. “We know at any one time what the potential impact of movements in raw material prices is going to be on the end-product price,” Fedier says. “Then, depending on the strategy for that particular product, you determine to what extent you’re able to pass [cost increases] on in price.” A price hike is not always a foregone conclusion, Fedier notes, citing stiff competition from China which forced its latex business to cut prices despite soaring costs. “The perfect idea would always be to recover whatever rises are coming through raw materials,” he says. “But the market may not allow you to do that.”
Customers need to be taken into consideration when pricing products. (See “What’s the Difference?” at the end of this article.) Understanding high-value customers and their willingness to swallow price increases is critical to a strategy’s success. That’s more than clear at airlines such as Ryanair, a €2.7 billion Irish budget carrier which has built its name on low fares. CFO Howard Millar calls the company’s customers “very price sensitive,” a fact of life that “you ignore at your peril.”
As he explains, Ryanair knows the triggers that allows it to jack up its prices, keeping fares low until two weeks before a flight, when time-pressed travellers have fewer options, so are willing to pay more. As CEO Michael O’Leary has joked, the best yields are derived from passengers travelling to funerals, “because they generally don’t get a lot of notice, they book late and they have to travel at certain times.”
Talk It Out
Once a price increase gets the green light, communication becomes key. It’s at this juncture that consultants at SKP recommend using press releases, interviews and conferences to prepare customers and other parts of the market for the increase. “Only if the rationale and impact of the price increase are made transparent will customers have a chance to react accordingly and to prepare themselves,” the company explains.
The amount of advanced warning needed depends on how much lead time a company has before raw material costs work through to the P&L. Some companies may have to announce immediate increases, while others can give customers a few weeks — or even months — of warning. Either way, offering a reason for the increase is crucial. When Evonik Industries, a €14.4 billion German industrial group, was planning to raise the price of its powder coating products in October, it sent out a press release in August, explaining that the “relentlessly rising costs of raw materials, energy, labour and logistics have made this decision unavoidable, despite all efforts to further enhance productivity and cost reduction.”