Time to review your pricing (again)

Without sounding like a broken record, this is a topic that is often discussed and debated time and time again. It all stems from your pricing strategy and the importance of a robust pricing strategy cannot be underestimated! When should I put my price up, how often should I put my price up, and can my market sustain continual price increases?

In our current business environment, we are seeing businesses face growing costs for compliance with legislation, staffing pressure and subsequent wage increases, freight costs increasing on the back of fuel costs and congestion issues, increasing funding costs, supply chain challenges leading to businesses holding more stock than they traditionally would have, and underlying material cost increasing. Are you facing rising costs that haven’t been passed on to the customer? Are jobs being priced correctly? Have you put your price up in the last 3 months? All these elements create an environment that is putting pressure on our margins.

Going hand in hand with the pricing discussion, is businesses having access to the right labour resource. Too often I hear about businesses that have significant projects in the pipeline, but with no staff to do the work. Whilst stock and the other factors mentioned above are sucking cash from businesses, the challenge of labour supply also cannot be understated.

Consequently, when considering pricing strategies, you need to know what your business is competing on, that is, what do you want to be famous for? What’s your competitive advantage and why do you beat your competitors? We often refer to a model called the market positioning star to assist business owners and management to consider what strategy best suits their business. Essentially you have three choices from which you must beat the market in one and meet the market in at least one other. The options are to compete on 1) Product / Service offering – your offer, 2) Price or 3) Customer Intimacy / Experience.

So, if your business is competing on price, then you are probably a low price, low margin, high volume business. If price isn’t a competitive strategy, and instead you are competing on differentiation, then you are probably a high price, high margin, low volume business. It’s vital that pricing strategies match your target market. It’s okay to be priced higher than your competitors, as long as you meet your customers’ expectations of quality and value, and you can clearly articulate that message to your customers.

To build on this concept we link value, cost and quality. It’s important to remember that Value = to the client, Cost = to the business. Below are a handful of questions to test how well you apply this in your business.

  • How do you ascertain value to your customers?
  • How do you package what you do and create value in the eyes of your customers?
  • What is your value proposition, can you capture the essence of the value you add?
  • How do you price your offer?
  • Which one is most important? How would you prioritise them?
  • What will you win on?

To round out the pricing discussion, we need to understand what some of the common pricing mistakes are. Below is a summary of the seven more common mistakes.

  1. Going in too low and undercutting all the time - For some businesses, this isn't a mistake, it's an entire strategy. Going in too low all the time might be great for your top-line revenue number, but it can wreak havoc on your bottom-line profit if it doesn’t align with your strategy.
  2. Using the same margin for all products -There's no rule or requirement that says all products that you sell needs the same margin. Your business might be able to afford smaller margins based on high sales volume, however even then you should find ways to add value and increase those margins.
  3. Not understanding the difference between margin and markup - Margin is the % of the selling price that is profit, whereas Markup is the % of the total costs that is profit. Making this mistake can lead to profit erosion. For example, if you operate with a 100% mark up, and then offered a 50% discount off your sales price, you would be selling your product at cost.
  4. Forgetting to take ALL costs into account - In order to price correctly every cost needs to be identified. Even small costs like credit card processing fees, which typically add 1% to 2% on every transaction can add up over time. Seek out costs, and know what is driving them, i.e., are they driven by activity and volume or are they fixed.
  5. Finding out what you competition charges and doing the same - Instead of being sheep and following your competition, do a bit more homework and start to discover and uncover the value you truly offer your customers. Then price for value. Try to compete on the value quality points from above, rather than just another supplier to your customers.
  6. Setting sales commissions based on revenue not a percentage of profit – If you are using a commission-based sales team, then paying commission based on the top-line vs commission based on gross profit or even the bottom line directly impacts profitability. The more you sell the more you reduce your profit. Sales commissions are a cost of sale and need to be factored into your pricing matrix.  
  7. Discounting instead of adding value - At just a 10% discount, a typical business with a GP% of 30% would need to sell 50% more units to keep the same profit on the bottom-line, this number increases to needing to sell 100% more units if your GP% is 20%. Instead of relying on discounting, consider if there is there a way you can add value to your product or service, again linking back to our quality and value points from above.

Avoiding pricing mistakes and being strong in your pricing proposition go hand-in-hand in building a profitable business. Pricing problems might be a symptom of other weaknesses in the business or your offering, such as poor quality, poor marketing of benefits, wrong match of service/product to customer needs etc.

Reviewing pricing is a discussion that often comes up, but how well do you actually do this? Are you good at providing desire or articulating the consequences of a course of action? Do you make it easy for a customer to buy from you? Do you understand the relationship between Cost, Quality and Value? When you’re reviewing your pricing strategies, just remember that pricing right is the fastest and most effective way to increase profits.

For any help with all your pricing strategies and to assess the impact of discounting on your business, contact Mike Atkinson from Bellingham Wallace.


Issue 131 June 2022