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Podcast December 6, 2022

E224 | How To Better Prepare To Combat Inflation, with Hermann Simon

Dominic MonkhouseDominic Monkhouse
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Inflation is back and here to stay. For companies, this ‘new normal’ means that the world in which they do business has fundamentally changed. Their main priority is to discover and apply new strategies to ensure their survival.

Hermann Simon is a renowned speaker, founder and honorary chairman of the world’s number-one pricing consultancy, Simon-Kucher & Partners. His impressive background and expertise in strategy and marketing make him one of the world’s most influential management thinkers and an invaluable source of knowledge on globalization, profit orientation, corporate strategy, world market leadership and pricing.

Hermann is also an acclaimed author with multiple bestsellers like Confessions of the Pricing Man and Hidden Champions of the Twenty-First Century, published and translated into over 25 languages. This week, he joined us for a new episode of The Melting Pot to share some insights into his new book, Beating Inflation. This guide is a solution to the current economic downturn, exacerbated by the global pandemic and the war between Ukraine and Russia. We talked about increasing costs and pricing, how often companies should increase their prices, so they don’t put too much strain on their clients and how to prepare their sales teams to combat inflation.

A conversation you don’t want to miss. Download and listen today.

In today’s episode:

  • Hermann’s new book, Beating Inflation: An Agile, Concrete and Effective Corporate Guide
  • What is inflation and how to deal with it
  • How often should companies raise prices
  • Increasing prices as a consultancy business
  • Reducing cost by offshoring 
  • How should leaders prepare their sales teams to tackle inflation
  • Managing the leaky bucket 

Links:

What exactly is inflation

Inflation is defined as the phenomenon that occurs when there is an overall increase in the prices of goods and services. But, as Hermann explains it, the true core of inflation is that money loses its power, which means that a unit of currency buys less than it did before, and as a consequence, the purchasing power of consumers decreases.

“Like perishable fruit, you have to get money as quickly as possible and get rid of it as quickly as possible. Inflation changes everything in the business process. When money loses its value, money becomes a perishable good.”

The current inflation wave, says Herman, affects countries in different degrees, depending primarily on their demographic indicators. And the duration of this crisis is dictated by how fast the issues that caused it are resolved.

“There are two categories of factors that created this situation. The first category is Corona and bottlenecks in the supply chain and the Ukraine war, which drove up energy prices. This cause is going to disappear within 1 to 3 years. The second category is the expansion of the money supply, of too much money, chasing too few goods and services,” which, according to Hermann, will take 5 to 10 years to resolve.

Beating Inflation: An Agile, Concrete and Effective Corporate Guide

In his new book, Beating Inflation: An Agile, Concrete and Effective Corporate Guide, Hermann Simon examines inflation from multiple perspectives and offers actions and strategies for companies to manage it and ensure their survival.

The main problem companies are now grappling with is the rapidly rising energy and raw materials costs, which are inevitably passed on to their customers. 

Raising prices across the board is an option that – if not handled well – can damage customer relationships, depress sales, and hurt margins. 

Hermann has two approaches to deal with that: “one is you have to better educate your salespeople to communicate value, because if you are able to communicate value, the customer may accept your price increase. And second is to toughen them psychologically through role-play scenarios, videos, etc.” 

How often should companies raise their prices?

For customers, the psychological impact is diminished when companies increase their prices more often and in smaller steps, says Hermann. “You have to adjust quickly and frequently. It’s better to do it four times per year, in smaller steps instead of one time per year, in a big chunk.”

Offering special pricing or discounts is a way to build brand loyalty and keep your current customers engaged and happy, but as a rule of thumb, it’s better to “establish a give-and-take system and not just to give discounts for nothing” and, more importantly, to create transparency around how those discounts are applied. 

“Companies don’t have transparency of their own system of discounts. Generally, larger customers or volumes should get higher discounts, but often that doesn’t get implemented, and the salesperson tries to hide those special discounts the company offers.”

Who benefits from inflation?

As inflation rises, it creates both winners and losers. Right now, it benefits those with fixed-rate credits or low-interest mortgages and governments, who pay back their huge debts in devalued money.

Businesses will also try to protect their profits by putting up their prices. But often, these are just illusory profits because the price increase is not creating new profit. It just balances out the gap created by the growing costs and the fluctuating inflation. 

“Let’s assume a company successfully increases its prices by 10%. Then, revenue will go up 10%, they report a 10% growth next year, and profit may go up 10%, or a little less, because the costs have increased. So, the world seems in order, but in real terms, if you correct for the inflation, nothing has been improved. The profit is the same.”

What should companies be aware of 

According to Hermann, the increase in pricing is just one of the issues businesses have to deal with, as inflation affects all business functions. Purchasing becomes now one of the most important components, and it’s the only thing that can guarantee that production can function. 

“Under normal conditions, the role of purchasing is to get the products we need for our production at the lowest possible prices. But now the challenge is to get them at all. If you buy electronic ships as a purchaser, you are not in a very strong position. Or if you want to have a craftsman, he says, ‘okay, if you don’t pay higher prices, I have ten customers waiting outside.’ If companies cannot get the products they need, the system collapses.”

Which companies have a better chance of surviving

In terms of which companies or countries have a better chance of surviving the recession, the balance leans towards companies that are producing indispensable day-to-day products. Companies whose products are postponable, like furniture and machinery, tend to be heavily affected, despite the popularity of their products. But there are differences inside this latter category as well, as some products can dictate the fate of entire industries and so are deemed indispensable.

“If we had no more Toyotas (automobiles), nothing would be happening. The capacity of the automotive industry is big enough to replace the production of Toyota. But if all Trumpf laser cutting machines disappeared, the global manufacturing system would collapse.” 

Another concept that Hermann explains is pricing power. This concept refers to how the uniqueness of a product allows a company to raise prices without curtailing demand or losing share to a competitor. 

“Apple is high tech, or Space X is also high tech. Everybody knows it. It’s like a mountain which is visible.”

Increasing prices as a consultancy business

What happens with companies that don’t have pricing power to compensate for cost increases? Hermann explains that at Simon-Kucher & Partners, they managed to compensate 50% of the cost increases by raising their prices. But companies will also need to increase cost efficiency to remain functional. And since the cost of materials is not something companies have control over, they’ll need to compensate by reducing the cost of labour and replacing human labour with automation and robotics. 

“You have to work mostly on the labour side. Labour has two components: wages and volume of labour. Wages you can’t do much about, especially with the talent shortage. So, you have to replace physical, manual and human labour through digitization technology.”

Reducing cost by offshoring 

With today’s communication technology and the rapid development of labour automation, companies can hire a cheaper workforce, or even transfer activities or ownership of a complete business process to a different country. 

“That applies even to high-qualification shops.” says Herman. “You don’t have to build a factory somewhere in Asia. You’ll just send the data over to Asia, and they’ll handle it.” 

Nowadays, everything can be handled through meetings on Zoom or other streaming platforms or even by creating call centres responsible for different companies. The language barrier is also no longer an issue since work positions in those areas seem to be more appealing and the idea of living in warmer climates tends to be a huge incentive for people searching to change the quality of their life.

“We can do much more by communicating digitally than I thought before. It may be different for first encounters, but for ongoing business relations, 50% will be replaced by digital meetings instead of moving your body in an aeroplane or a car for thousand kilometres across a globe.”

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