Pricing in an Inflationary Environment

One of the challenges private business owners face, is how to tackle their pricing. This heightens in the inflationary environment we now face.

The starting point for a sound pricing strategy is to review your pricing annually.

In this blog, I share some key insights on the ways in which I optimize pricing for my clients.

Pricing Goal

I always start with keeping the end goal in mind.

What are we trying to achieve with our pricing?

At a macro level, we are attempting to make a profit margin on our selling price after direct and operating expenses, that allows us to receive a commercial return on our risk and business investment. Our goal is to be a profitable and sustainable business.

At a micro level, our pricing goal is to protect our gross margin maintaining it at or above the current level. This means we need to extend periodic price increases to cover increases in material cost inputs, direct wages growth and inflationary increases in operational expenditure.

Price Makers & Price Takers

I have previously written about defining whether you are a Price Maker or Price Taker.

Price Makers are businesses that are fundamentally able to set their own pricing. Examples include service providers, hospitality venues and creatives.

Price Takers are businesses that have their prices set or heavily influenced by industry norms or customer requirements. Examples include the construction sector, commodities and large retail suppliers.

Pricing Strategy

Your pricing strategy is influenced by whether you are a Price Maker or Price Taker.

If you are a Price Taker, your pricing strategy considerations include:

  • Understanding where your business sits in your niche – premium, mid-market or lower end

  • Where does your pricing sit compared to your industry position?

  • Where do your competitors sit in relation to their industry position?

  • Have there been changes to your products or services that warrant a price increase because of greater features or benefits over the last 12 months?

  • Consider implementing an annual increase at or above inflation to maintain gross and net profit margin (based on changes to direct and indirect costs)

If you are a Price Maker, your pricing strategy considerations include:

  • Conduct an annual review of the exact changes to direct material costs, direct wages and other operating costs

  • Calculate the percentage price increase required to maintain your margins, given the annual increases to operating costs

  • What is your industry position and pricing position in the market compared to your competitors?

  • Assess the current climate in your industry in relation to pricing? Up, neutral or downward pressure?

  • Have there been changes to your products or services that warrant a merit-based price increase because of greater features or benefits over the last 12 months?

  • With the analysis and data above in hand, attempt to broker meetings with customers to explain the impact of cost increases on your business and the need to increase prices accordingly. The key here is to present a business case for annual price increases based on logic and hard data, rather than simply asking for a price increase without context

  • Adopt a consultative approach with your customers. They may not like what you are saying or necessarily agree. However, they are more likely to respect your position and consider your requests

Execution

The next step in your pricing strategy is to consider how to execute your pricing strategy.

A baseline plan includes:

  • Verbal notification of price increase, and date of effect, stated ideally in person (3-6 months from price increase)

  • Written notification (closely following verbal notice 3-6 months from price increase)

  • Implementation of price increase normally nominated at start of financial or calendar year. Alternatively, this may be an effective date at the start of an industry season

Dealing with objections

Some objections on pricing increases are inevitable from customers. However, if you follow the strategy set out here, and act with integrity, you have at least positioned yourself to deal with it.

Remember the pricing goal is to be a profitable and sustainable business.

You must protect yourself and your business stakeholders from margin erosion, business risk or even potential business ruin.

Pricing Noise

I always suggest to clients that it is an acceptable tolerance to have at least some pricing noise in their business.

Pricing noise is where your prices create some resistance or feedback from your clients or target market. Somewhere between 5-10% of friction is acceptable in receiving feedback that your pricing is high.

Back Yourself

Adopting a pricing strategy should be a key component of your overall business strategy. Particularly in the inflationary environment we are in currently.

Here’s the kicker.

If you don’t address your pricing, who will?

Ensure your pricing keeps pace with inflation and increases to operational expenditure.

Protect your precious margins.

Maintain your business sustainability.

Back yourself in executing a strategy of regular price increases.

 

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