While many business leaders recognise the need to raise prices in the current environment, they also worry about volume losses and consumer retention. Done properly, though, a new pricing model can not only address today’s cost pressures, but also to harness new, longer-term margin opportunities when cost pressures abate.
The three key factors to consider when setting prices are costs, customers, and competition. To implement a pricing strategy that offers the customer value, competes with other providers in the same sector, and delivers realistic profits, you need access to market data and insights, price monitoring tools, and an understanding of the various pricing strategies that can be adopted.
Get to grips with your cost structure – your fixed costs and variable costs – and run a ‘what if’ analysis to see how changes in variables, such as unit costs, would affect your profits. Calculate how much you need to sell your offering to protect your margin. Using cash flow management software, such as AGICAP will allow you to monitor cost increases in your supply chain and adjust your price accordingly.
You need to know how much your target customers are willing to pay for your products or services and how they will react to any price increases. When it comes to increasing prices, your price elasticity – the degree to which demand for your product or service can remain in response to a stretch in pricing –is key and requires careful monitoring of price changes and sales data. Customer forums can provide a useful source of insight into how price increases are perceived.
You also need to know about your competitors’ pricing strategies. Monitoring tools like Skuudle can track competitor prices and monitor fluctuations in the market, while their social media activity can be a source of valuable information on how their products and services are perceived compared with their price point.
Which pricing strategy?
Choosing the right pricing strategy for your business should be a decision informed by data. For example, your existing client and sales data can be cross-referenced with stock rotations to analyse what has previously sold well and when, and can also reveal the impact of any discounts or promotions on sales. Armed with sufficient data you can identify the best pricing strategy for your business.
Competitive pricing sets a price in comparison with your competitors, and might mean selling your products or services at a better price, or offering better payment terms. This can be a useful strategy if you are entering a new market, or if your competitors are well-established in the market place. Longer-term, competing solely on price is unlikely to generate long-term customer relationships.
Discounted pricing is used to attract customers by offering cheaper prices for the most popular products while increasing profits on other items by setting those margins higher than inflation.
The tactic of selling multiple products for a lower rate than customers would pay if they purchased each item individually – called bundle pricing – increases perceived value in the eyes of the customer. This can be a useful way of clearing underperforming inventory items, but owners need to ensure that the profits made on the volume sales cover any losses on discounted items.
Premium pricing involves setting a high price to reflect the quality or exclusivity of a product or service. Clearly, this strategy is only viable if the business is confident their offering will be perceived by its customer base as worthy of the higher price point.
Arguably the most useful strategy in volatile trading conditions, Dynamic pricing involves tracking demand and adjusting your pricing based on current market forces; competitors’ pricing, availability and supply chain costs for example.
Whichever route you choose, your pricing strategy needs to be reviewed on a regular basis, at least every six months, and adjustments will need to be made in response to trading data. If profits have plateaued, your competitors are making more sales than you, or if customer retention is poor, new pricing strategies should be explored. Any changes you make should be based on up-to-date research and analysis of the market landscape.
The current inflationary peroiod presents challenges to smaller businesses but also opportunities. Managed properly, a new go-to-market pricing staretgy can enable businesses to:
- Maintain margins and rectify any historic pricing mistakes
- Focus sales teams to engage with customers and address new pricing strategies in the context of shared business concerns
- Embed the internal processes and culture to make regular pricing exercises an engine for future growth and profitability
Companies that execute their pricing strategy well will improve their revenues, margins, and customer loyalty and will be equipped to respond more effectively to future shocks, inflationary or otherwise.
During inflationary cycles, many businesses will experience tightened pressure on their cash flow and working capital position whilst new pricing models take time to work their way through the customer base. At Capify we offer a range of business loans to help support your business through high and low periods.
Check to see if you’re eligible for one of our loans with our online eligibility checker. Or, if you’d prefer to talk to a member of our team, we’d be happy to guide you through the process. Give us a call today on 0800 1510980