Have you recently been thinking about raising your prices due to increasing costs? Perhaps you have been affected by changes in the supply chain, or maybe social distancing has limited your capacity. Putting all of these things together can make the cost of delivering a service much higher.
With profit margins tightening, there is the question of who should absorb the costs? Should they be passed on to the customer? Under normal circumstances, passing on extra costs isn’t so much of an issue as it is during uncertain economic times. In the current situation, people are questioning their expenditure, and an increase in price might make them re-evaluate whether they really need what you provide.
On the flip side, if your costs have reduced (for example, you are now holding meetings online, saving on travel or perhaps saving costs on office space), would you then pass this saving on to customers?
Raising prices can be a delicate matter, especially during uncertain economic times, and requires some careful thought. Here are some pricing factors to consider:
Pricing objectives are primarily set to maximise sales revenue over and above costs to achieve profit. However, currently, pricing objectives could be to revive demand with a longer-term perspective.
Cost-plus is the cost of production plus the fixed percentage of profit. In the cost-plus approach, businesses look at the cost of delivering and add a margin to it.
A dramatic rise in prices might appear alarming to the customer. However, it is also crucial to ensure the business is sustainable, which customers may understand, especially in the B2B world. However, it is worth looking at what efficiencies you can make to maintain the price if possible.
Differential pricing is when a business sets different prices for the same product or service for different markets. For example, rates could differ between graphic locations, organisations and individuals, or seasons. If you already do this, you may wish to continue.
Competitor Based Pricing
Competitor based pricing is when a business sets prices according to their competitors’ prices. Depending on the market conditions, companies decide whether they want to set their prices higher, lower or on par with their competitors. It is always worth keeping an eye on your competitors’ prices to ensure you are within the ballpark for your products or services.
Value-oriented pricing is when prices are based on the customer’s perceived value of a product or service. In the current landscape, this is a pricing strategy that could work well. To apply this pricing model, you need to look at the value you provide to your clients and how much they are prepared to pay for it.
Traditionally, increasing prices is seen as the single most effective way of increasing profits. However, during these uncertain times, it is better to reconsider the value you add to your customers and if possible, maintain your price point to continue your ongoing relationships. This could be achieved by either absorbing the costs, if you can, or looking for ways to change your model to reduce costs.