Pricing Strategies

As I keep repeating, strategy is not something you do once in a while. It is something that needs to be integral as to how any business leader views the business organisation they are leading. It is a mindset. As we all know, many businesses are being faced by inflationary pressures from various quarters. The costs of raw materials, commodities, shipping costs and labour costs are all on the rise. The response to this needs to be a strategic one.

The standard typical responses to a rise in costs is:-

  • Raising prices to be charged to clients
  • Cutting profit margins by absorbing some or all of the increase in costs
  • Reduce other costs by reducing quality or cutting corners

To be honest, just deciding to do one of the above 3 options or a mixture of them, without proper thought and analysis, is a very short sighted way of dealing with things. In the era of data analysis and digital transformation, business leaders have the duty to use all these tools, backed by an agile culture, to use this juncture as a strategic opportunity to think out of the box.

Let me try to be more specific

  1. Realign your offerings

First of all this could be an opportunity for some spring cleaning. Could it be the case where some products in your offering, need to be dropped and new ones with different propositions included? Could it be the case where products need to bundled or unbundled in the way they are offered, to bridge low margin products with higher margin products and so put forward a better overall value proposition? Can offerings be linked so that low margin products be used to direct clients to offering with better margins?
Moreover, it would be a mistake to overemphasize price elasticity as the only way clients respond to the changes they see happening. It would be a mistake to forget that customers actually balance price and quality, using their own perceptions to do so. An option in the case, where clients are very price sensitive on certain products, is to reduce quantity offered, keeping the unit price the same. Other options would be offering products with less frills at the usual price and positioning products with more frills at a higher price, than clients are used too, establishing this as a new offering at the higher end of the market.

2. Repositioning Opportunity
At any given time, most product or service offerings have a huge misalignment between the perceived value and the actual price. In some cases the perceived value is higher than the price, meaning the products is under priced and in other cases the situation is that the perceived value is lower than the actual price, meaning the product or service is overpriced.

The more common situation, is that a product is underpriced relative to the value that customers derive. In that case, the uncertainty surrounding inflation, combined with customers’ expectations that they might need to pay more, provides an opportunity to change communication and position a product in a higher price tier. Persistent underpricing turns price into an oxidizing agent that tarnishes the offering’s image, and inflation offers a chance for companies to correct the perceptions.

3. Change the Price model
Rising inflationary pressures give a compelling reason to implement changes in the pricing model. For example, a price per unit of consumption, is more transparent and usually lower, that when products are bought to have them stockpiled. Such prices also align better with how customers create and derive value. They pay when they consume.
New pricing models often sacrifice the upfront revenue impact, but they generally make up for that with higher recurring revenue over a customer’s lifetime. Finally, this is what makes new price models a strategic decision rather than tactical response.

So be strategic. Think out of the box. Using the power of data and its analysis to create offerings and new price models. Those that embrace all this have the opportunity to become market leaders. Those that keep doing what they always did, can wake up one day to realise they are out of the market.

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