Prices and digitalization: “Racing a carriage against a car”

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In the Gulf Cooperation Council (GCC), digitalization strongly influences how consumers spend their time and access products and services. While many companies acknowledge the significant economic impact of digitalization, they don’t know where to start addressing the issue. Only with the right price strategy will they be able to catch up with this mega trend. International counterparts show the way.

Nine out of ten companies (93 percent) consider digitalization relevant for their business. Yet exactly how they can make the most of the digital revolution’s opportunities is a question often met with perplexity. This is a key finding of the Global Pricing Study 2016*, conducted by Simon-Kucher & Partners, in which approximately 2,200 managers from companies in more than 40 countries and a wide variety of industries participated.

The international study’s results relate to what is currently happening in the region, particularly in the UAE. With the average person now owning at least three connected devices at one time (1), digitalization is having a profound impact across B2C industries. However, even though current initiatives by the UAE e-government are pushing for digitalization, Lovrenc Kessler, Managing Partner of Simon-Kucher’s office in Dubai, knows from his consulting experience that most companies in the region are still struggling to develop the right measures to tap into the large economic potential of digitally savvy consumers. “Pricing plays a key role when it comes to digitalization within a company. Nevertheless it is often overlooked. The result: even the best digitalization strategies are condemned to failure”, explains Kessler.

Overall optimistic outlook, yet concerns about impact on prices and margins

The study findings show that the mega trend is mainly met with optimism, since 73 percent of international companies see digitalization as an opportunity, particularly respondents from the tourism, software, transport, logistics and insurance industries.

Nevertheless, the results are alarming: 27 percent of the surveyed companies consider the digital revolution to be a risk. Furthermore, every fifth company within this 27 percent is uncertain which measures are necessary to overcome the potential risks of digitalization. This number decreases to every tenth company among the optimists.

Moreover, six out of ten participants expect digitalization to have a positive impact on their sales. Still, almost just as many fear that the mega trend will have a negative impact on prices and margins.

According to Kessler, particularly companies in the UAE need to stay on the ball, since digitalization is the new opportunity to retain and grow the customer base when traditional approaches fail to meet growth aspirations. This is due to the continuous rise of competition across various sectors, but also the fact that consumers are becoming increasingly engaged with their purchasing and are demanding customized services. In fact, 57 percent of consumers conduct product research online (1). “Companies need to rethink what customers value most – and create the right digital channel strategy to take advantage of the new possibilities for competitive differentiation”, Kessler advises local businesses.

Pricing tools: Companies can prepare themselves for digitalization

As the global study shows, most companies either completely neglect the topic of price management in their digitalization strategy, or are simply unable to handle the issue. “The problem is that when it comes to pricing, many companies are still working with outdated tools. It’s similar to racing a carriage against a car”, says Kessler. However, the good news for companies: Success in this field is no accident. Prices and margins don’t necessarily need to suffer from the effects of digitalization. In fact, companies that prepare can expect the exact opposite outcome. So the Global Pricing Study’s “best” companies prove that tailor-made tools are definitely worthwhile, with 13 percent of companies belonging to this group. By investing in their price management, they are already in a much better position than their competitors. Their profits, as measured by EBITDA margins, are approximately a quarter higher (27 percent) than the profits of the “rest”. These are the international counterparts, companies in the region should follow suit.

Focus on online retail: There’s no more time for experimenting

Particularly with online retail, it can already be seen which international players have found the right answers to digitalization. Ever-improving algorithms, whereby customers not only receive individualized offers but also personalized prices, maximize the likelihood of a purchase. Even though almost half of companies (49 percent) in the retail sector use pricing software, 65 percent also believe they should invest more in this area. “Companies need to keep up with the times when it comes to online pricing. With steady digital consumer growth there is no time to waste on trial and error”, says Kessler.

Are price models digital-ready?

Facing digital transformation makes using the right tools and price models crucial and so Kessler recommends that every company checks whether these are ready for the digital age. Especially when it comes to dynamic pricing, price differentiation and innovative price models, digitalization offers an array of opportunities. “Digitalization is opportunity and risk at once. We are still at the start of a rapid development,” says the pricing expert. “It’s up to the companies in the region to act quickly and embrace the digital transformation”. Then nothing stands in the way of their success.

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