Even if you’ve already discovered a higher beer price at your regulars: Most businesses are planning to raise prices in the next few months, but haven’t done so yet. So here we provide some thoughts on how to do it well. Ahead, also read the next post to get it quantitatively right.

Do I need to increase prices at all?

This question is quite justified. The almost 10% inflation still says little about how much more expensive your company has to buy to date. Electricity and gas may be a very small part of your business, or your margins may be so large that you can simply swallow the higher prices. If so, it’s worth considering keeping prices stable and retaining existing customers and attracting new ones in an environment of sharply rising prices. However, on the one hand, this scenario will only apply to very few companies, and on the other hand, all companies will have to reckon with massive wage increases in the near future. It is therefore advisable in any case to deal with the topic and the technology of a sensible price increase.

When is the right time?

A price increase is rarely received euphorically, yet it is a bad idea to postpone it for too long! The customer does not appreciate it if you have not made a price increase for three years, but now a much larger one at once. This gratitude will not be forthcoming. And in general, now is a very good time to increase prices, because the arguments for doing so are really obvious to everyone at the moment.

Shock prayers to heaven or deeply relaxed

Warren Buffet cites “pricing power” as the most important criterion for a company’s value. If a company can easily push through a price increase in the market, then this pricing power is given, but if one sends prayers to heaven so that the customer does not leave, there is obviously a lack of pricing power. You can (see next article) pre-test the ability to raise prices, and in most cases that makes a lot of sense, because a customer that’s gone is gone. However, if your customers immediately go away when a price increase is appropriate, there is a fundamental problem with your business case and it won’t be saved by reducing your margin.

Rethink pricing models

If a price increase is unavoidable, you could use the opportunity to rethink your pricing model in general. There are many possibilities, from “flat prices” to “everything as a service”. It would go beyond the scope of this article to describe all the possibilities, but I would like to give you some food for thought:

Often, certain prices – also due to years of very low inflation – have already burned themselves into customers’ brains in such a way that an abrupt increase of, say, 10% can actually be risky. The simplest solution would be to keep core prices and signal prices constant and to charge extra for certain additional services that may have been added over time.

In this way, you can often actually increase average prices very well without changing the base price by only pricing additional services according to the acceptance of the target group. A very price-sensitive buyer will actually get a product cheaper without additional services, while a safety-oriented customer will pay a premium for longer warranty periods, for example. Intelligently done, average price and sales increase with high acceptance of the respective target group.

Segment target groups

Inflation in general, and therefore also price increases in your company, have very different effects depending on the target group. When consumers notice that the price increase is nibbling away at affordability, a lot happens in the lower and upper price segments: many purchases move to the entry-level price segment to give themselves breathing room for important purchases. In the upper price segment, the reward takes place, which is also there to reassure oneself that one still belongs to that stratum that can afford something now and then. How this looks specifically with your customers and/or products is something that should be empirically tested in advance.

It should be clear that a linear price increase is rarely the ideal solution!!

Rethinking pricing

Unfortunately, I have not been able to provide a simple recipe for the price increase that may be necessary. There is none. Rather, my idea was to open your eyes to the fact that pricing is an extremely complex tool that can have a very strong impact on the bottom line. Investing in pricing excellence now should help you to get through the next years well and at least defend your margin.

If you have further questions about pricing, contact the author

22/09/2022

Copyright: Interconnection, Publication free of charge for coverage regarding the study and InterConnection Consulting.