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Profit Matters!! What's Your Pricing Strategy?

Product pricing strategy is a never-ending business management conversation within most corporations. How to successfully raise prices without alienating customers and, eventually, losing business is critical to successful business strategy. Inflation causes costs to increase, thus, leading to shrinking net profits. A business manager has several choices when this happens. He/She can find new vendors with lower costs (if possible), absorb the additional costs to the detriment of net profit, or increase customer prices. Of course for some costs, there is no alternative in finding a replacement, i.e. utilities, taxes, licenses, etc. This is part of the operations review discuss that we have with clients everyday as business consultants.

How to successfully raise prices, pass cost increases on to customers, while still retaining loyalty in a competitive environment and/or, perhaps, a sluggish economy is a difficult business management strategy decision. Every business is unique; however, each must maintain a certain profit margin to not only stay in business but experience annual growth. Although some businesses managers might sacrifice current profits to ensure customer loyalty, ultimately prices must be increased as a safeguard to business longevity.

Assuming the business strategy is not to offer the lowest pricing among competitors, the following are six practical ideas we recommend as business consultants to increase pricing and retain customers:

(1) Develop a Pricing Strategy

There is more than one way to effectively increase pricing. A business must decide if it wants to raise prices a little at a time (incrementally) or all at once (immediately). Obviously, incremental price increases take longer to achieve the optimum price desired but, ultimately, the target price is attained. While either approach works, it is important for a business to understand its customer base. One business management approach might be acceptable to one customers whereas another approach achieves greater acceptance with its customers. Implementation success is a factor that must be considered.

(2) Be Transparent

First time or infrequent customers will probably never know if prices are increased; however, they will most likely check a business' competition. For loyal customers, transparency can be a key ingredient to successfully raising prices and retaining customers. When customers know in advance that prices will be raised on certain products and services and the reason behind the increases, the increases are generally more acceptable. It is best to avoid "sticker shock" price increases. You don’t like it and neither do customers.

(3) Consider Variable Pricing

Rather than raising prices on basic products or services, additional profits can be realized through "add-on" pricing by offering quantity discounts, extended warranties, personalized customer service, or preferred customer incentives as inducements to increase purchases. Consider any type of creative pricing strategy to increase revenues and profits.

(4) Stress Value

While many businesses managers use product and service descriptions to market and sell, a company stressing value can set itself apart from its competition. Higher quality products and services justify higher pricing. Buyers, however, need to understand the differentiation between what is offered by one business versus another business. It is critically important for customers to comprehend that quality, service, uniqueness, etc. are worth a higher cost.

(5) Have an Explanation Ready

Some customers will never question a price increase while others will always question a price increase. Be prepared to answer pricing questions head on. There is no point in trying to be evasive. Customers are astute when it comes to pricing and not interested in the details of a company's profit or loss when it comes to spending their own money. It is important, however, to have a concise answer ready for those customers who do question a pricing change. Even though a customer might not particularly like an increase, a general understanding allows a customer to be more tolerant of the increase. Proactive business management always outperforms reactive management.

(6) Secure Employee Buy-In

Since employees are the link between a business and its customers, employees must understand the reasons for price increases. When questioned by customers, employees must be able to give adequate explanations. Before they can be positive with customers and advocates for the company, they must feel comfortable with the answers they are expected to give. This comfort level results from appropriate training and adequate explanation of price increases, which is then followed by employee commitment to the business pricing strategy.

Summary - Increase Prices the Right Way

An appropriate business strategy question is not can or should a business raise prices but rather how is it done successfully to achieve a two-fold objective: maintain or increase profits and retain customers. When employees themselves understand price increases, are trained to give understandable explanations to customers, and customers receive advance notice of important pending price increases, then customer retention can be achieved. Obtaining the help of an experienced business consultant can help expedite the pricing review and needed adjustment.

Let OnTarget Strategy's Denver and Boulder Colorado based business consultants assist your organization with creating or updating a product pricing strategy. An optimized pricing strategy realizes true market value of a product/service and helps grow bottom line profits.

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