Nothing can help or harm a small to mid-market business more than pricing actions. A recent study of US Small Businesses showed that 74% of owners were concerned with the impact of inflation on their business. With the recent inflationary pressures, how businesses are handling their pricing will be critical to their success in 2022. This article will discuss the current climate and how to look at price actions and give you a longer-term view of maintaining a healthy pricing portfolio of your products and services.
Starting with the current environment – 2021 inflation as defined by the Consumer Price index was up 6.7%. January 2022 data came in at 7.5%. All around us, prices have been rising, whether it’s restaurants, groceries, supplies, or housing. You can bury your head in the sand and hope your costs will come down, but the reality of the situation is that all phases of the economy have accepted there will be some form of price increases.
Hopefully most of you have implemented some form of price increase(s) over the past six months. Before we look at ways to manage your price increases, let’s look at the four most common types of buyers:
- Price Buyer – Focus only on the variable costs and not total costs. Most businesses will have some these customers, don’t let them hold your business back from being profitable.
- Research Buyer – This buyer wants to get multiple quotes and look at the total costs. It’s not always about price and the good news is once they decide, they tend to be very loyal.
- Relationship Buyer – These buyers expect to pay a fair price, they want to know you care about their business and don’t treat them as a number.
- High-Quality Buyer – Often called the affluent buyer, these buyers want the premiere service and want to feel like they are your best customers.
Develop a Price Increase Process
The best way to improve your business’s profitability is to have a process and plan for managing your pricing. We advise a process that looks something like this:
- Understand all your cost increases – We often see clients that only think about price increases that were announced to them. They often forget about services fees or higher minimums that may impact their buying power.
- Understand your mix of customers – This is so important in determining how to implement a price increase. If you have customers that have a harder time passing along your increases, it is often better to have a bigger increase, but less frequently.
- Look at your current profit and volume levels by-product or service – We commonly find clients who don’t want to increase prices in what they deem commodity products or services. These cost increases are real and should be increased across your portfolio.
- Get a feel for the overall market, find where you fit in terms of pricing – This is often misunderstood. If you have a strong brand and high quality – this can be the opportunity to lead to a reasonable price increase in the market. Act as the leader.
Based on this analysis, you can begin to develop plans to increase your pricing. One sure way to negatively impact your business is a cost-plus approach across all products and customers. Tying price increases to certain costs will typically cause the price and research buyer to demand price decreases when those identified costs begin to come down. It’s better to communicate that you are doing the best you can in a rising-cost environment and that you have evaluated all aspects of your business before implementing your updated price structure.
Conduct an Annual Price Band Review
Another crucial area that you can review annually is your price portfolio. I’ve come across this challenge many times with product-based companies. They often have 4-10 products across a range of prices, from commodity to luxury. A common mistake is to implement a 4% average price increase by raising commodity prices by 2% and raising slower volume premium products by 6-7%. In the graph below, you will see the impact of this type of pricing over 2-4 price increases. The price difference in premium products tends to get too high for anyone but high-quality buyers and others trade down to the value tier. As a result the company’s overall margins decline.
There are many ways to look at price increases, the number one point is to have a process and follow it consistently. The more rigor you can put into your price analysis, the healthier your business will be. Feel free to reach out to me at firstname.lastname@example.org if you have questions or you would like more insights on this challenging topic.