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Thursday, September 21, 2023

Sharpen your pricing strategy in a time of rising inflation

With South African inflation surging to a 13-year high in June, it’s more important than ever for small and medium businesses to be agile in their pricing strategies. This is, however, easier said than done due to an unpredictable exchange rate, load shedding, the impact of lockdowns in China, and the war in Ukraine on global supply chains.

Yet, with consumers and B2B customers under pressure, every business needs to find ways to optimise its margins while offering an attractive value proposition. No single approach works for every industry or market, given that company pricing power, customer price sensitivity, and the volatility of input costs vary.

Here are some proven tips for getting the right pricing strategy and architecture in place:

Choose a philosophy that works for your business

One pricing strategy is simply adding a markup to your costs and changing the price each time your expenses increase. But other strategies enable you to highlight your value to your customer and be proactive rather than continuously reacting to the movement of exchange rates, fuel, and additional input costs.

Some examples are:

  • Competitive pricing – Tracking what your competitors charge in close to real-time and adjusting pricing in response. Most companies in price-sensitive sectors where comparison shopping is easy (like e-commerce retail) may need this element in their overall strategy.
  • Loss leader pricing – Using some aggressively priced products to attract customers and entice them to buy higher-margin products.
  • Value-based pricing – Setting prices primarily based on the customer’s perceived value of a product or service.
  • Premium pricing – Selling premium products and services to customers that want quality and exclusive goods.
  • Price skimming – Inflating the price of goods or services at the time of launch and then lowering them as market penetration increases. This is great when you have a product that early adopters will buy at a premium.
  • Penetration pricing – Offering new products at lower prices to gain market share, then ramping up costs as adoption rises.

Tailor your offering to different customer segments

Understanding what your customers want and what they are willing and able to pay is key to optimising your pricing strategy. It can be helpful to segment them or create personas. Think about each potential customer’s motivations and requirements. For example, you could have a value range of TVs for young families, plus a premium selection for discerning professionals.

Create a perception of value

The most successful businesses nurture a perception of high importance among their customers, so they won’t switch to save a buck or two. There are many ways in which you can increase the perceived value of your offering:

  • Rebrand or change the packaging, especially if the existing look is a little old-fashioned.
  • Convey scarcity or urgency. Indicate that the item may go out of stock or that there is only limited time to access it at its present point.
  • Put the price in context. For example, R1000 for helping a client with tax returns may look expensive, but not when contextualised as two meals out for two.
  • Offer a proof point. For example, a gym owner can talk about the health benefits and the fun of their gym classes rather than just presenting a price.
  • Frame it next to a more expensive alternative. Many online software companies offer a low-cost offering alongside an extremely expensive option to nudge you to the one in the middle.
  • Bundle complementary products people would usually want to buy together. This helps customers choose faster and creates a perception they are getting real value for money.

Track and optimise

Pricing is dynamic, which means the most successful businesses continuously assess whether they are meeting their strategic objectives. Some of the possible questions to ask include:

  • How does it affect my business if my online and offline pricing differ?
  • Do we make more money selling slightly lower volumes at higher prices?
  • Which bundles are selling well, and how profitable are they?
  • Are we giving things away that we could be charging for?
  • What is our customers’ tolerance for higher pricing?

Your accounting system can help you generate budgets and forecasts that will give you the insights you need to make the right decisions.

Pricing is a strategic priority

Treating pricing as a strategic priority can set your business up for long-term success. Getting it wrong means you’ll constantly struggle to regain lost market share or income because you priced an offering too high or too low. Mastering the science of setting the right price points for your products and services will help you grow your business, maintain a healthy cash flow, and drive profitability.

By Viresh Harduth, Vice President, Small Business, Sage Africa & Middle East

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