Pricing Strategy Amid Surging Inflation
Read time: 3 minutes
With inflation reaching a 40-year high, corporate pricing strategies are taking on greater importance. It’s easy enough to simply raise prices, but looking at the wide range of factors that constitute an effective pricing strategy invariably results in better outcomes.
The following is a seven-point checklist of the factors to consider when deciding to raise prices:
- Conditions in your company’s business sector. Some industries or business segments are more affected by inflation. Some are experiencing growing demand despite higher prices, some are seeing slower sales, and some are seeing little difference. Your sector’s reaction to inflation will affect your pricing decisions.
- Intensity of demand changes. Demand may be rising or falling in your industry, but is the change widespread? In some businesses demand varies considerably by geography. Growth may be concentrated in certain areas while in others it may be falling. Also, where is your competition stiffest? Do you face uniform competition geographically or do you have a mix of competitive and not-so-competitive market areas?
- Supply concentration. Similar to the demand side, are your suppliers concentrated in number or by geography? The degree of competition on the supply side typically shapes the flexibility you have in pricing your products or services.
- Labor costs and supply. How competitive is the labor market for your company’s employees? Are you losing workers to other companies due to higher compensation elsewhere? Is greater turnover increasing the costs of recruiting and training? If your company has experienced higher costs to attract and retain personnel, or to retain outsourced services, that should be factored into your pricing calculations.
- Customer price sensitivity. Since some customers are more sensitive to pricing than others, segment your company’s customer base by their price sensitivity. I have a “Ten Bin” methodology to do that. I sort customers into 10 groups, with the first containing those who are the least sensitive and the tenth being those who are most sensitive to pricing. Once you know who and where those customers are, and which products or services they buy from you, you can maximize the pricing of those products and services.
- Consider your other strategies. What are your strategic objectives aside from pricing? Is your aim to increase market share or defend it? Are you a segment leader or a follower? Is revenue growth a priority over profitability, or vice versa?
- Consider your competition. When you consider your pricing options, factor in the likely reaction from your competitors. What are they pursuing — market share, profitability, something else? What are their strengths and weaknesses? Do they have cost advantages, better manufacturing facilities, greater scale, more powerful brands?
After taking these factors into consideration, the next step, of course, is making a pricing decision. As a result of having made many such decisions, I have a few suggestions that can make raising prices somewhat easier.
First, when changing price, it is helpful to introduce a product or service innovation at the same time. That provides a logical reason for a price increase. The innovation need not be major. It can be the addition of technology or a feature that raises the item’s perceived value and thus makes a higher price less difficult for the market to accept.
In B2B markets, it’s also productive to provide the sales team with the proper incentives when raising prices in order to increase price realization, or receiving the full price for the item or service. For example, salespeople who get the list price or 90% to 99% of the full price would receive a 100% commission. Those who get 80% to 89% of list might get a 10% haircut off their commission. If they go below 80% of list, they must get pricing committee approval.
But there is also a carrot. If they get 100% of the rate card price, give them a 20% kicker in their commission. And if they go over 110%, you give them 150% of their commission. The specifics, of course, vary by industry, product, and company tradition, but a bonus commission is a small price to pay for a large increase in revenue.
About Irshad Shafique
Irshad Shafique is a Vice President and Partner at Dynamic Strategic Advisory, which helps private equity firms drive growth at their portfolio companies. Earlier, he served as Global Head of Strategic Pricing (Revenue Growth Management) at Johnson & Johnson, where he was responsible for improving the company’s profitability through pricing strategies that involved category- and enterprise-wide programs. Previously, Irshad held strategic pricing roles at ServiceMaster, Nokia, and Virgin Mobile USA.
This article was adapted from the GLG Webinar “Pricing Strategy Amid Inflation Pressures.” If you would like access to events like this or would like to speak with experts like Irshad Shafique or any of our approximately 1 million industry experts, please contact us.