But companies still need to tread carefully. At Salzgitter, a €10 billion German steel group, finance chief Heinz Jörg Fuhrmann says he is sceptical about the “more aggressive and public” pricing communication policies that many companies are following today. If a company wants long-lasting relationships with its customers, Fuhrmann argues, it should ensure they hear about price increases directly in “personal and trustful communication” rather than through press releases. Does he think companies will ever return to holding these discussions behind closed doors? “I hope that we return to this kind of communication,” he says.
Whenever a price increase is communicated to the market, the work doesn’t stop once there. At Lanxess, a €6.6 billion German chemicals group spun out from Bayer in 2004, CFO Matthias Zachert describes the pricing process as a circle. Information about the changing cost of raw materials flows throughout the company. If prices are raised, the sales force feeds back information from the front line about customers’ reactions. Then, monthly reports let the company monitor the end result on the P&L statement and determine whether further increases should be considered. “This is how the circle is eventually closed,” he explains.
One crucial step, the CFO adds, is to be able to differentiate between an increase or drop in sales due to a price increase or owing to, say, a change in volume. That sort of analysis, he says, is the only way to know whether a pricing strategy is working.
The current pricing strategy at Lanxess seems to be working. Zachert points out with some pride that for the past three years the company has been able to recover input-cost inflation through price increases. And that hasn’t dented demand — as a report from JPMorgan in October notes, “Lanxess holds a strong track record of growing prices and volumes in tandem.”
For Zachert, a disciplined approach to pricing is something that has to be driven into the culture of a company. “Million dollar” IT systems can help with more efficient reporting and tracking of data, he says, but it’s more important that his staff “get a grip on volatility” in the current market. “Good processes, systems and instruments don’t mean anything if people are not using them,” Zachert insists.
More to Come
Indeed, people are as important as the process when it comes to price management, and the biggest change for finance chiefs in this new era of pricing may be the increase in the level of their personal involvement. Traditionally CFOs have distanced themselves from the nitty-gritty of price setting. But as the subject becomes more strategic, many are finding themselves drawn into the process. That’s not a bad thing for a company, or CFOs themselves — Ciba’s Fedier says that becoming more hands-on in pricing has allowed him to develop an even greater understanding of Ciba’s markets.
More finance chiefs will have an opportunity to do the same. The Economist Intelligence Unit, a sister business to CFO Europe, forecasts that commodity prices will continue to fall in 2009 due to weak demand. By October 2008, oil had already fallen to less than $70 a barrel from its record of $147 over the summer. Although prices won’t rebound in 2010, the Economist Intelligence Unit says, “in the longer-term, commodity prices are expected to recover in tandem with stronger global demand, particularly from developing countries.” Speculation that OPEC would cut oil production in October highlights the continuing volatility in input costs that companies face.
At Continental, CFO Hippe worries that the company’s price hikes won’t cover the rising cost of rubber during the second half of 2008. He expects more price increases during the first half of 2009, although he’s hopeful that they won’t need to be as extreme as this year. But he cautions that even when raw material prices fall in a slowing global economy, another problem emerges: dwindling demand, which has its own impact on margins. Whatever happens, he says, “this won’t be over in 2009.”
Tim Burke is senior editor at CFO Europe.