Hermann Simon on Beating Inflation & The Cost Of Failing To Manage Pricing
11 February 2024 Newsletter
“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” Albert Einstein
Hope you’re Thriving!
It’s been a great week, with workshops, meetings and working on my new book.
It’s also been really rewarding to meet with a few of the teams we work with this week and see how our impact is compounding and that their strategy and team are building better businesses with better cultures and better profits.
Let’s talk numbers.
Hermann Simon On Inflation
One of my favourite podcasts is The Melting Pot from Dominic Monkhouse. I love that Dom is just innately curious, and it’s easy to tell that he loves learning from his guests and is enthralled in the conversation.
Last week, Dom had Hermann Simon as a guest, who is one of the world’s leading experts on pricing, to talk about “Inflation and its effect on pricing strategy”. Hermann’s firm, Simon-Kucher, has around 2,500 staff globally focussed on helping firms get their pricing right. Amongst the bevy of great takeaways from the interview, there was one that stuck with me: Hermann’s prediction for inflation.
Hermann predicts that inflation will remain at around 5% each year for the next five years. And he explained the forces that will drive this and why it will take five years to unfold.
Maybe inflation is off your radar, maybe you’ve forgotten about it. There is certainly a lot of talk about a potential recession and that interest rates will go downward this year. But that doesn’t mean that inflation will stop.
If any of the above is remotely true, more than ever, you must manage your costs and pricing closely to achieve an acceptable profit. I’ve been in too many strategic planning workshops recently where leaders are dumbfounded about why they didn’t achieve the predicted gross profit or net profit goals.
Below are links to the podcast with Dominic Monkhouse and Hermann Simon link, as well as a link to Dom and I on his podcast last year talking about Onboarding.
Coincidentally, I read Hermann Simon’s latest book Beating Inflation: An Agile, Concrete and Effective Corporate Guide over the holiday break, and it’s such an important book that we’re recommending that all of our teams read it.
The brutal truth is that, as Hermann puts it in the book’s opening:
“For the first time since the 1970s, we are experiencing inflation, and this inflation will probably persist for several years. Today’s generation of managers has no experience with inflation, which brings major risks for companies and consumers alike.
Inflation does affect not only pricing and prices but also all activities and functions of the company. It starts with the CEO, who must induce a culture change, and extends to the management of finance, purchasing, supply chain, costs, production, and human resources. Of course, the sales force is hit particularly hard as sales reps must push through larger and more frequent price increases to customers.”
One of the simple concepts from the book is pre-emptive price adjustment and the importance of staying ahead of inflation. As I said earlier, too many times, I’ve seen leaders contemplating a drop in profitability at the end of a month or quarter and trying to decide what to do about it after the fact – when it’s too late.
See the simple pre-emptive price adjustment image below.
Of course, without the painful experience of previously managing inflation (like managers from the 1970s), today’s managers are often reluctant to increase pricing for fear of losing customers.
This speaks to the importance of strategy, where you are meeting the customer’s needs better than anyone else and have established a unique and valuable position in the market that is different from competitors.
And this is why strategic planning is so important. An effective strategic planning rhythm with a coach compounds your gains and helps you to weather the storms.
The Cost Of Failing To Manage Pricing
Let’s assume for a moment that Hermann’s prediction is correct, that inflation will increase by 5% each year for five years.
What could that mean for you?
I modelled that scenario out with a client this week and have recreated it in the image below. In this example, if there is no pricing change, profits will halve in a year and almost disappear within two years. By year 5, the firm is losing $3.8m annually – a 15% loss.
Of course, by managing the inflation and increasing pricing to match inflation, the company retains its 9.6% profit. Even better is to use the pre-emptive price adjustment above.
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