Despite the many challenges faced by small businesses over the past few years, those that have forged ahead and seen success have done so by adapting to the environment as required.
As the ‘new normal’ has so far been marred with economic uncertainty, a widespread labour and skills shortage and a deteriorating global situation, successful businesses will need to continue to adapt and readapt regularly. One element of your business that will require this approach is your pricing strategy.
What is a pricing strategy?
A pricing strategy is the way your business determines its price for products and services. There are many models that can be adopted to set your prices, including:
- Cost-plus pricing: the cost to provide your product or service plus a percentage mark-up.
- Competitive pricing: what your competition charges.
- Value based pricing: what your customer is prepared to pay.
- Price skimming: initially pricing high due to high demand then slowly decreasing.
- Penetration pricing: initially pricing low to gain market share then slowly increasing.
- Loss leader pricing: selling a product or service low to sell other related products or services at higher margins.
- Dynamic pricing: changing the price in real-time depending on demand for the product or service.
- Freemium pricing: providing basic aspects of a product or service for no cost and charging a premium for additional or advanced capabilities.
Regardless of the pricing model your business adopts, the primary goal of your pricing strategy should be to maximise short and long-term profits.
Why is an appropriate pricing strategy important?
Your pricing strategy is one of the key factors that will determine your success. This is because it’s largely responsible for the revenue and profits your business makes.
If your prices are too high, you might find that while margins are also high, volume is low. This is due to customers choosing a lower priced competitor, resulting in poor profitability. Conversely, if your prices are too low, volume may be high, but margins may be low, which will also result in poor profitability.
To maintain the delicate balance between volume and profitability, it is critical that your pricing is appropriate with a view to market and economic conditions.
Why should your pricing strategy be reviewed?
As we are all aware, Australia and New Zealand are currently experiencing a rapidly changing economic environment with high inflation, high demand, increasing interest rates, low unemployment and permeating supply chain issues. It is therefore critical that your pricing strategy is reviewed in light of the challenging and evolving situation.
If your business is operating in an industry that is facing high demand, low supply and increasing costs, then not raising prices will most likely lead to foregone profits. Similarly, if you are in an industry that is facing increased competition, not decreasing prices will most likely lead to reduced income and profits.
Importantly, this assessment needs to be made on an individual basis and needs to be continuously addressed. No two businesses face identical issues and conditions can change quickly.
How often should your pricing strategy be reviewed?
You should review your prices regularly and more often than you have previously, due again to the changing conditions. The market you operate in and the products and services you offer will dictate how often prices should be reviewed.
If you are in an industry that relies heavily on raw inputs, you have likely been reviewing your prices every three months or so. In the current market it may be appropriate to review prices monthly.
If you are in an industry that relies heavily on labour, you have likely been reviewing your prices every year or so. In the current market it may be appropriate to review prices every six months, inline with the salary review process.
Don’t forget to communicate
As with most things in life, communication is key. Communicating price changes with your customers and the reasons for the change will likely lead to greater acceptance.
If you would like assistance with reviewing your pricing strategy or to book a ‘William Buck Hour’ (Australia or New Zealand) consultation in which we will review your complete business strategy, please contact your local William Buck Business Advisor.