Pricing in Precarious Times
With soaring inflation and the cost of living crisis only worsening, prices are rising in all aspects of life.
Is your business increasing its prices to keep up?
Off the back of his Vistage webinar ‘The Psychology of Pricing’, we caught up with international speaker, author and portfolio marketing director David Abbott.
As an Engineering Science and Economics graduate from Oxford University, David began his career as an electronics and design engineer, before transitioning to senior roles in marketing and business management later in life. His vast and varied experience places him well to offer expert advice to organisations.
We sat down with David to find out more about the key challenges for businesses around pricing, how to implement price increases in today’s climate and how to prove your value to customers.
The key challenges with pricing
If costs are increasing across the board, then it makes sense for a business’ prices to rise to reflect that, right? Well, that doesn’t always feel so simple.
So, what are the key challenges businesses face when determining or raising their prices?
First, says David, is confidence.
“A lot of businesses stress like mad about what their customers’ reaction is going to be – and then they’ll put it off,” he explains.
Some businesses might even put off price increases for five or six years.
This means that, instead of increasing prices in smaller, less noticeable increments over time, they’re then forced to implement larger increases all in one go later down the line.
“And, of course, that feels very painful for their customers.”
2. Understanding pricing
Setting pricing is a key part of running a business – but one that few leaders know how to do well.
“Price is probably one of the least understood aspects of business,” David says. “And it’s one of the most challenging because nobody wants to get the price wrong.”
By setting its prices too low, a business risks leaving money on the table and reducing its profit margins. But by setting prices too high, it risks losing out on sales. However, sometimes fewer sales at a higher price is the better outcome; but businesses tend not to calculate the optimum price, they just chase all business and use discounts to try to ensure they don’t lose a sale.
3. Determining value
Lastly, a business’ pricing should reflect the true value of its services for customers.
“There’s a lot more science to pricing than people think,” David says, “but it’s not an absolute science.”
David explains that when working one-on-one with clients, he uses a number of tools to get a sense of what price a business should pitch.
“If you’ve gone through those steps and you’ve got some thoughts and evidence on where you ought to be positioning, you’ll have more confidence in the decision you’ve made.”
Another key element that comes into play here is understanding the value of their service or product. “Value isn’t always monetary – it can have many different aspects,” David says.
“But if you genuinely figure out what that value is, that will give you insight into where you ought to be positioning the price.”
Price increases in the current climate
Prices everywhere are going up – from everyday consumer goods to business supplies.
And it’s not only businesses that are taking note.
Customers are observant – they anticipate price increases because it’s constantly talked about on the news and in their daily lives.
“Over the past six months talking to Vistage groups, I don’t think there’s been a single instance where anybody has increased their price and noticed the slightest bit of pushback,” David says.
So, if customers are already anticipating price increases, “it means, in a way, that if you’re not doing something about your prices and your costs are going up, you’re missing a trick. The way inflation is going, your margin is going to deteriorate very rapidly.
“If you’re going to increase your prices, now is the time.”
The dangers of discounting
Some businesses might see discounting as a way to increase sales and take on a higher number of customers. But falling into this habit is a dangerous game.
“I’m not a fan of discounts,” David says. “That’s not to say you should never discount, but that discounts are a blunt instrument.”
It can seem reasonable to think that a higher number of customers equals a higher profit margin. But that’s not always the case when they’re getting your services at reduced prices.
“I worked with one company back in 2020 that doubled in size over five years,” David says. “But their profitability had gone down from around 10% to 1%. That was because they had got into a discounting habit.”
David advises: “If you’re going to do a discount, how much do your sales need to increase in order to break even? If that number is not a believable number, why are you doing it?
“Aren’t you better off not generating the extra sales but getting sales at that higher margin, rather than working even harder and getting less money to do so?”
Not only that, but also if customers know that a particular business frequently offers discounts, they’re unlikely to want to pay full price.
“If your customers know there’s almost certainly going to be a sale, they’ll wait,” David warns. “If something is urgent, then they might not have that opportunity. But if they can defer the purchase, they’ll wait until they can buy it at the lowest profit for you.”
The relationship between cost and value
So, how can businesses make sure that their customers see the value in the products enough to warrant the price increases?
Well, it’s all about clearly communicating that value to them. And where some businesses go wrong, is in the value statements on their websites.
“There’s a famous marketing quote from the 60s that goes: ‘Nobody wants to buy a quarter-inch drill – they want a quarter-inch hole in the wall.’,” David says. “Further, nobody wants a quarter-inch hole in the wall, but rather, they want a quarter-inch fixing to hang a picture.
“There’s no point talking about how fabulous the drill bit is if all they care about is making the wall look great by hanging a picture. It’s the wrong message.”
So, businesses should avoid wall-to-wall text focused solely on what they do, as opposed to the benefits their customers will get from using their service or product.
Instead, they should strive to understand the critical factors driving those purchase decisions and build their value statements around those.
David also adds that, “pricing is only one of the four Ps – or seven Ps, depending on which model you use – but all of them work together. You can’t take any one P of marketing and just focus on that and ignore all the others.”
Instead, every aspect of a business’ marketing needs to fit together. “They’re about the brand experience – how customers perceive you, whether they trust you, and if they want to pay the price you’re about to charge.”
Don’t procrastinate – but don’t rush, either
We asked David what advice he’d offer to businesses that are thinking about implementing price increases.
“Don’t procrastinate,” he says. “But don’t rush into it, either.”
Businesses that are planning on increasing their prices should first understand what the potential sales impact could be, and what that means for profit. “So, if you’re about to do a 5% price increase and you know that you could lose a third of your sales, it is possible you’ll still be better off. You need to take the time to do the calculations, and once you have you should then act.”
If possible, David suggests, businesses should run a price test so they know the potential impacts that increases could have.
“So, don’t procrastinate, but don’t just dive in. Test.”
Thanks to David for taking the time to speak with us for this interview.