After a year of hard decisions that you’ve had to make as an owner-manager due to the Coronavirus pandemic, it is this time of year that business owners usually take time to look ahead to the future and make strategic decisions for the future of their business.

As the news about the future relationship between the UK and the EU and the possibility of a trade deal is turning pessimistic, it increases the uncertainty for all of us when we try to plan ahead.

One of the key decisions facing business owners right now is pricing.

We’ve had some interesting conversations with clients over the past few months regarding pricing and whilst many didn’t think it to be ethical to increase prices during a pandemic and financial crisis, many of businesses are facing increased costs which will have to be passed on to their customers in order to stay afloat.

We’ve found that many of our clients fall into three categories:

  • Customer Perception: The crisis has given owner-managers the time and space to work ON their business and evaluate their pricing structure to realise they haven’t been charging enough for years. Many haven’t increased their prices since the economic crash of 2008 for fear of “upsetting” customers and losing business
  • Increased Demand: The demand for some services has increased and therefore consumers will be willing to pay just that little bit extra to make up for the closure of your business through the restrictions
  • Increasing Costs: You’re spending longer on procedures due to the ever-changing restrictions and rules on how you operate, meaning your prices need to reflect that

Setting prices can be as complex or as simple as you make it.

A simple method 

The simplest method is to apply an inflationary increase to your prices.  An increase of between 1 to 3% can often prove palatable to customers and can have a bigger impact on your profitability than you might assume.

A McKinsey study found that a simple 1% increase in pricing can potentially deliver an 8% increase in net profits. If such a commercial strategy is adhered to year on year the effect compounds and renders the business in a far healthier and wealthier state.

A little thought is needed as opposed to a blanket increase across the board. The products and services delivered require filtering to isolate those to which an increase can apply. Similarly, customers and their sectors require a little assessment to identify those to which an increase can be justified.

Inertia

If you have not increased prices by an inflationary amount in recent years then it can cause difficulty because your regular customers are not expecting the increase. The commercial messaging requires preparation to minimise debates and ensure a successful outcome.

The point to bear in mind is that your customers face the same challenges and some of them will be or should be contemplating a similar strategy. You will need to be prepared to explain the reasons behind your price increase, and no one should be embarrassed to stand by such a decision, ultimately a business has to make money otherwise it would be called a charity.

If you have a policy of incremental price increased each year, then your customer base will be used to this policy and a consistent and fair approach to pricing will remove some of the inertia felt in comparison to a business that is nervous about its pricing.

Ultimately if you don’t review your pricing each year then you are inadvertently giving your customers a price cut each year (in what is called “Real Terms”) but your customers won’t realise it or give you credit for it.

Inflation

Increasing your prices by a small percentage may have positive effects on your businesses profitability but consider what the impact is if you do not increase your prices? The salaries of your staff are very unlikely to be getting cheaper. The cost of materials and overheads are always influenced by inflation.

In the lead up to Christmas 2016, we wrote a brief article about the complexities of inflation and pricing, and how the published rates of inflation might actually not be the same as the inflation your business experiences. To read more see our article: What we can learn from Toblerone.

Inflation this year has been low. At the time of writing, the Bank of England have published that inflation stands at 0.7%, which is historically very low. However different items in the economy are experiencing different levels of inflation.

For example, the Office of National Statistics published in November that regular salaries for businesses are seeing inflation more like 1.9% (source here).

If your business largest cost is the people it employs then clearly your business will be experiencing inflation higher than the 0.7% that the bank of England are stating. It also means that if your prices are not increasing then the chances are that next year the profits of the business will be less.

But in hindsight will you be brave enough to say it was because prices were not increase in line with rising costs?

Adopting the 1 – 3% approach requires courage in these times but taking strong decisions for the future. If your business is one to weather the storms around us at this time then your business will be ready to grow and thrive on the other side. 

Do you need advice on your pricing strategy? Or maybe you haven’t even thought about it until now?

Take the time now to reflect on your pricing and if it needs an increase to ensure your expenses don’t outweigh your profits. And talk to us. Pricing is a section of our A4G Breakthrough Recovery Programme. We can help review your pricing and commercial approaches to achieve a more profitable and secure future for your business.

Review your pricing now

Contact me today!

Josh Curties

BA (Hons) FCA

Partner & Principal Adviser

01474 853856

Send me a message

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