Simon-Kucher: US business leaders expect profit margins to decline this year, with cost increases outpacing revenue growth
Industry growth leaders are positioning for stability in the face of strong macroeconomic headwinds
[Boston, MA], [April 13, 2023] – The 2023 Business Growth Study from Simon-Kucher, a global growth consultancy, found that a large majority of US companies are expecting that, despite revenues increasing (by five to eight percent) this year, cost increases remain a challenge due to lower profit margins. Despite strong headwinds, nearly two-thirds of respondents (64 percent) view a recession as a growth opportunity.
In 2022, even though revenue increased by roughly six to eight percent across industries, margin was only expanding by four to six percent, indicating that not all the revenue expansion was hitting the bottom line. In 2023, although revenue is expected to increase at a cadence of five to seven percent, margin is only expected to grow by three to five percent, indicating further margin erosion. The decrease in both top and bottom-line revenue is due to a host of headwinds including higher inflation, rising interest rates, continued recession fears, financial market shockwaves, and ongoing layoffs.
“The results of our Business Growth Study and continued macroeconomic challenges indicate companies should employ strategies to stabilize their businesses across all functional areas. There is no one silver bullet, but there is a silver lining. Many executives see recession as an opportunity for growth, which highlights the resilience of US companies amidst challenging economic conditions,” said Shikha Jain, partner at Simon-Kucher. “Business leaders, who consider a recession as a growth opportunity, attribute their confidence to opportunities to gain market share while their competitors may struggle or cut investments.”
The study also found that sixty-four percent of executives cited operational improvements as the primary driver of profit. Increasing prices (50 percent) and expensing offerings or services (45 percent) followed as the second and third levers of profit. The least important profit driver was to cut costs - by reducing variable or fixed costs (13 percent). Companies will need to take a holistic approach to drive both revenue and profit growth in the current business environment.
Create a Growth Plan
As companies navigate 2023, industries are leveraging many factors to maintain growth including sales force effectiveness, pricing, and recession-proofing. According to our study results, the biggest factors impacting success were sales force agility and sales effectiveness, top determinants across industries.
Scott Sands, senior partner at Simon-Kucher, stated, “Companies that grew in 2022 were overwhelmingly investing in Sales & Marketing budgets for 2023, working hard to keep a virtuous cycle in place. Companies that reported growing margins in 2022 were being even more aggressive, in our assessment, because they could afford to, and they understood that the need to invest in increased differentiation and demand. Increases in sales talent expenses and other costs are growing more quickly than in the past 20 years, so the pressure to better align with customer preferences is even more intense.”
Best practices for companies that emerged favorably from prior recessions focused on cutting costs that do not impede customer acquisition, innovation, or retention.
Anticipate tailwinds from pricing power
While pricing power differs between industries, 72 percent of industry leaders plan to increase prices again in 2023, despite two thirds of companies implementing price increases in 2022.
“Customization is key to price increases to make them last and to avoid inflation fatigue,” explained Jain. “We’ve found industry leaders were more likely to take a surgical approach to price increases to minimize volume loss and protect long-term customer loyalty."
Our study indicates that top performing companies are taking decisive action to raise prices, to stay ahead of cost increases, and investing in sales force effectiveness to ensure price changes are accepted by customers, rather than cutting costs.
The complete study is available upon request.
*About the Study: The global consultancy firm, Simon-Kucher, partnered with Rep Data to conduct the online 2023 Business Growth Study between October and November 2022. Nearly 400 executives and C-suite level employees in the US were surveyed on their companies’ performance in 2022, indicators for success or recession in 2023 and general business for 2023.
*About the Rep Data: Rep Data provides full-service data collection solutions for primary researchers, helping expedite data collection for primary quantitative research studies, with a hyper-focus on data quality and consistent execution. The company’s mission is to be a reliable, repeatable data collection partner for market research agencies, management consultancies, Fortune 500 corporations, advertising agencies, brand strategy consultancies, universities, communications agencies, public relations firms and more. repdata.com
For more information, please contact:
Stephen Brown, Cookerly PR
tel.: +1-404-816-2037
Niki Irby
Tel.: +1-404-388-6598
Email: niki.irby@simon-kucher.com
About Simon-Kucher
Simon-Kucher is a global consultancy with more than 2,000 employees in 30 countries. Our sole focus is on unlocking better growth that drives measurable revenue and profit for our clients. We achieve this by optimizing every lever of their commercial strategy – product, price, innovation, marketing, and sales – based on deep insights into what customers want and value. With 37 years of experience in monetization topics of all kinds, we are regarded as the world’s leading pricing and growth specialist.