Most business owners and managers get nervous about pricing. They might feel like they price too little, too much, or that they have to justify their changes to their customers to prevent a negative response. While all these things need to be considered, the first question to ask is how we can evaluate the health of our price and update it in a timely, effective strategy.
Multiple factors can affect your profitability. Rising costs, change in supply or demand, inflation, R&D as technology progresses, and more. These changes are hard to identify, gauge, and plan for the future.
Knowing your pricing health is vital to your success. Once you have an idea of where your price fits in the market today, then you can use information and techniques to evaluate and update it.
What if we knew the future for our pricing decisions? Thanks to data and trends, we can predict where pricing is headed within the market and what we can do about it.
Here is a quick guide to choosing and implementing the right pricing decisions for your company.
Consistently Evaluate Your Current Price
“If you always do what you’ve always done, you’ll always get what you’ve always got.” – Henry Ford
It’s very common to see a business hold onto their same prices for years. Between 2010-2020 there was an average inflation rate of about 2%. Not only do business leaders lose money because of inflation, but trying to keep the same prices puts them at a disadvantage because they can’t add value to their products and systems. They are racing to the bottom.
For example, one business owner we worked with had a small business that was in a saturated market. To compete, he kept lowering the prices. This hurt him since he had his hands tied around his back. He could not improve the product and had a high employee turnover.
Instead of finding ways to add more value to the product and differentiate it from his competitors, he suffered the consequences of a shrinking profit. Once he rose his prices by a few percentage points on a long-term schedule, he began to have more funds and the ability to develop better goods.
While this business owner made an intentional decision to not change his price at first, many others do it unintentionally. They aren’t routinely evaluating their prices.
Consistently analyze your prices. It’s different for everyone but you may consider it often, every quarter, every six months—whatever you feel works best for your business.
We recommend always keeping an eye out for changes in the market (like sudden supply price changes), but a good formal process to avoid lapses would be quarterly.
You must have a strong pulse on what's happening in your market. What are competitors charging and what does it include? Make sure you don't alienate your target audience. Too low and they may not think you offer enough value, too high, and you might price them out or change their perception. If you charge higher than your peers, ask yourself what value justifies it and make sure to promote it.
Another option is reviewing industry price guides. While your top competitors will give you a personalized idea of prices, these guides will give you a picture of the industry as a whole.
Reviewing this market data will help you guide and plan where you want to go with your price.
Develop a Road Map to Follow
If you don’t know what road to take and where you want to go, you’ll end up anywhere—and likely somewhere you don’t want to be.
A strong pricing roadmap will help you plan for now and the future.
The founder of Amazon, Jeff Bezos, is famous for his 3-year planning process. Anything longer, he believes, becomes irrelevant. Technology moves too fast. Anything shorter isn't enough. With three years, he's able to move fast and intentionally on where he wants to take his companies.
Bezos mentions this in response to thinking just in financial quarters. With his theory, the next quarter was already decided three years ago. He put it into place and it started in motion. Today, he's working on the next three years for his ventures.
We can follow that same concept for our businesses, specifically pricing. Where do you want your prices to be in three years? How could we gradually get there?
There might be a few components involved and that’s why planning is good. It might be price sensitivity. The amount and frequency will matter. You can develop the best plan to make it easily adopted and communicated.
For example, has your price stayed the same for years? You might be better off making a bigger jump than normal because your customers will notice the change whether it's a 20 cent increase on a $4.99 sandwich or a 30 cent increase. The impact is likely the same. After that, you can make smaller increases as prices and goals change throughout the years.
Planning these increases allows customers to have the time to adapt and ease into the changes. While they understand pricing changes, they also don't want to be shocked. By creating a strong plan, you can ensure a healthy evolution of your business as environments change.
Why are these increases so important and worth the growing pains? According to McKinsey & Company, a 1% increase in price creates an average of 8.7% increase for operating profits (if sales volume remains the same). A subtle change can transform your business and equip you to create more valuable solutions for customers.
Automate and Invest in the Right Tools
A craftsman is nothing without her tools. It’s similar for our businesses. We can only do so much if we don’t have the right resources and technology.
For price health, businesses should find ways to gather data on their company and invest in better processes and automation.
A lot is going on in a modern business. You have tons of workflows, processes, and systems all working towards serving your customers.
You are dealing with suppliers, equipment, emails, legal requirements, HR, internal communication, customer service—the list goes on. All these facets have valuable information.
With so much going on, humans can't gather it all and use it for improvement. Invest in the right CRM platform and other technologies that help you operate your business. Once you have the right tools, make sure they can talk to each other. The more integrated your platforms are, the more accurate your data is, and the better decisions you can make on price.
Platforms vary by industry and need but make sure you get ones that fit your business and help you gather data on sales funnels, operations, finances, and more.
When your data is automated, you can study your prices.
What is the average amount your customer spends? How many products do you sell with your most expensive line? How many do you sell for your cheapest line? What kind of sales or price changes can you experiment with and how do customers respond?
You'll know the right balance as you study your prices. If every customer that walks into the door buys your product, that might mean your prices are too low. You could make more profit margin if you raise the price; you might not sell to every customer, but it could mean less work for your employees, more value-based service, and better longevity with possible increases in overall revenue.
Model Scenarios to Strategize
Ideas look good on paper but it's hard to put them into action. Before you pull the trigger, it's nice to have a better visual of what small changes could mean for your business.
You can use data combined with your unique knowledge of your business and customers to come up with scenarios based on possible decisions. This minimizes your risk and also helps you anticipate challenges and changes in the future. You can evaluate your current state and see what might happen if you adjust the price.
Profit Frog is a powerful platform that lets you model your business decisions and help you put them into action. You can download reports, use the interactive dashboard, and customize your planning to get the best picture of the future. Curious how a 1% increase could affect your business? You can try it on the platform in seconds.
Play with numbers and develop a pricing plan you feel confident in.
Modeling allows you to see the possibility, which helps translate it into a vision for your company. You can easily share with the leaders in your business how your change of price could affect the bottom line and provide more funds to invest in the company.
Develop a Communication Strategy
Finally, decide how you plan on communicating your price change.
How customers perceive your price will all depend on how you communicate it. If it’s a small raise, and it’s communicated as “materials cost more and we want to provide quality” then they will likely understand.
If it is an artificial price raise based on your profitability goals, you may need to find a way to communicate your value as is or add more value to justify the change (especially if it is higher than some of your competitors).
A great goal is to always find ways to improve your product, process, and experience. The better you get at it, the easier it is to raise or justify your price. Ultimately, it’s all about the perceived value of the customer.
Know why you should change the price. Demand? Supply? More or less value in the product? Is there a big gap between your price and the market? These questions will help guide you in the right direction and communicate the right message.
Today, you can start evaluating your price. Use this article to get started and test your ideas out on Profit Frog.