Price Escalators: The Part of Pricing Many People Forget About 💲
Price escalators: Note – this article was originally published by Ranson Pricing on 29th June 2016.
We live in a world where inflation is a fact of life. Our suppliers increase their prices, shrinking our margins, and our customers enjoy increases in the nominal value of their income, increasing their willingness to pay. But there seem to be few organisations out there which use a ‘price escalator’ to slowly but surely increase their price levels. There are four good reasons why you should do this.
Obviously, when a business expands, companies have a lot of things to consider and one of which is price escalation.
Price escalation, as the term suggests, is when the price increases when a good is exported and imported into a broad market. This could be due to taxes, tariffs to pay to import/export goods, shipping costs or distribution channels (for storing your products in warehouses).
Quite similar to inflation but focused on a particular product, rather than an entire store or market. Inflation affects all of your products, whereas, in price escalation, it only affects some of them.
In this article, we will discuss the four good reasons why some companies use price escalators. In addition, we will provide you with the causes of price escalation and ways on how to overcome it. By the end of this article, you’ll be able to understand and apply the four valuable reasons for using price escalators to good use.
4 Good Reasons to Use Price Escalators
1. Small increases through prices escalators add up over time
If you increase your prices by 1% every six months, then after five years your prices will be 10.5% higher than if you had not changed the prices at all. During those years you will enjoy the benefits of slightly higher revenues, which can be reinvested in your products, services and pricing processes to secure a prosperous future for your business.
2. Small changes through price escalators are less likely to be noticed by competitors
Imagine bumping your prices up by 10.5% at once. Your competitors and customers would surely notice and most likely the competitor would be able to hoover up business as a result. By increasing prices slowly but surely, your actions will help to instil market discipline in both competitors and customers.
3. Small changes are less costly to correct if things do not go according to plan
If you had to raise prices by 10.5% all at once and things did not work out, it could be very costly for your business in terms of lost revenue, brand damage and customer trust. But if you increase prices by just 1% at a time, if things do not work out then you can change things back with no harm done.
4. Small changes can be applied across your product range and tailored accordingly
You can also happily leave a price increase in some products while removing it from others. Products might include bundles of different items as well as goods and services sold individually. So the price escalation method is extremely flexible.
Causes of price escalation
Price escalation has a lot of different causes. Some of these directly affect exported products and others affect products sold in a foreign country.
You have to think about your multi-currency strategy and also location-specific issues if you’re marketing and selling your products to international markets.
For every market you are in, you’ll have to consider different product types affirming different competitive conditions. Not only that but also rules in the respective domestic country. This will hugely affect the pricing strategy you select.
At first, it looks cheaper to get your products from international sellers, however, in the long run, it’s more expensive if you don’t factor in additional costs.
5 Ways to Beat Price Escalation
Below are some ways to beat price escalation:
- Insert a clause in your vendor contracts – Having one would protect you against any cost increases. Such contracts though won’t protect you against little price increases, but they will help you if costs begin skyrocketing. A common price escalation clause indicates a percentage price increase as a trigger.
- Think Local – Shipping, transportation, warehousing costs are cheaper for local products. Also, goods sold locally are not subjects to tariffs, importation costs, and other costs associated with selling goods in a foreign market. Not to mention, the additional cost of lawyers that you need to deal with complicated international trade rules and laws.
- Reclassify your products – In the international market, reclassifying your product helps you save money. By doing so, you’ll be able to avoid tariffs because your products will be classified as goods with lower duties. This can also reduce administration costs since you’ll no longer have to deal with trade bureaucracies.
- Produce efficiently or more cheaply – Find out cheaper ways to produce your goods. Initially, this could be more expensive because you need to purchase goods in bulk. However, you’ll save money in the long run.
- Take a careful look at the inflation rate in the local market – Don’t just focus on the international markets, you also need to keep an eye on the local market too.
From the point of view of the current pandemic, price escalation clauses are more important. After all, there is significant global economic instability as well as problems in labour and raw material supplies.
By increasing prices slowly, your actions will help to instil market discipline in both competitors and customers. In any case, competitors are less likely to notice small changes through price escalators.
Small changes like increasing prices by just 1% at a time are less costly to correct if things do not work out. You can just simply change things back with no harm done.
Price escalation is one of the many challenges that business owners face. Consider the tips provided above on “4 ways to beat price escalation”. Do it thoughtfully and carefully considering the consequences.
Businesses have issues and problems that they need to think about such as price escalation. Failure to address the problem properly will not only hinder growth but could cost more money further down the line.
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