Simon Kucher, a leading consultant in sales growth and commercial effectiveness, just published their latest global pricing survey. In this study, named the “State of Pricing 2024”, (link here) they surveyed over 2,700 companies globally.
The most striking slide refers to how “price realization” has evolved over the last few years, see snapshot below. Price Realization measures the ratio between the profit realized through a price increase compared to the original projection. In other words, your price increases are not sticking.
Overall price realization for companies used to be around 28% (on average) in 2019, then increased to 33% in 2021 and last year averaged 48%. That is a notable improvement over time, however it still means that LESS THAN HALF of any given price increase materializes to the bottom line. And when looking at the distribution of the actual price realizations, an astounding 26% of the respondents admitted their price realization was between 0% and 20%. Unfortunately, it’s also likely that they suffered from 100% of the cost increases from their suppliers.
Admittedly, strong price realization is one of the most complex disciplines in pricing, given the number of variables at play.
If your company is struggling to reach satisfactory price realization, consider these recommendations:
- CLARITY: Do you have clear visibility to where and how much the price increase should yield? Not just an aggregate number, but down to an individual customer and SKU level. Without this level of granularity, you will see your price increase disappear like grains of sand in your hand.
- ACCOUNTABILITY: Are all the people involved in the pricing decisions aware of their expectations? And do they understand that every single dollar concession, in aggregate, becomes a gaping hole in the overall company performance?
- TRANSPARENCY: Do you have metrics and data in place to track realization rates at the most granular level? If so, are you reviewing these with your sales leaders?
- BEHAVIORS: And are you celebrating and rewarding those who are getting the price and growing their business? Are you coaching the sellers that are struggling to have the “price” conversation with their customer?
- EXCEPTIONS: Are you tracking why certain customers are getting less of (or no price increase)? If they promised something in return (e.g., more volume), who is tracking that commitment, to ensure it happens? Do you also have a few customers that consistently bypass your price increases, yielding every declining margin over time? Do you have a plan to address those exceptions?
If your pricing organization is effectively managing these five areas, I guarantee your price realization will be in the upper spectrum of most companies. Unfortunately, this is often easier said than done, given the complexities mentioned above.
If you need support in taking your pricing processes to the next level, please reach out to me.
