Price Adjustment with Precision: How to Adjust your Prices during Inflation
Most B2B companies make the mistake of setting uniform prices or across-the-board price adjustments. There are those that largely offer unnecessary discounts too frequently on items that customers don’t even need to buy. On the other hand, some customers are willing to buy from you regardless of the discount you offer because they really need your products or services. Others would have been sold at a 10% discount vs. 20%. So, what is price adjustment?
Unfortunately, most companies don’t think about how their prices influence customers. Many fail to factor in how their customers have different requirements, problems, value drivers, and needs.
What’s worse is that they think that frequently implementing discounts and slashing prices will solve most of their problems. When in fact, in the long run, the impact of these decisions results in margin loss and customer dependency on discounts. Hence, the way you present prices to customers can change how they buy from you.
In this article, we discuss what precision pricing is and how it can propel your business towards growth.
We show you how you can identify which areas you can delicately implement price increases for different clients. At Taylor Wells advisory, we believe that setting up a pricing system that’s been developed through research and testing is the key strategy to pricing profitably during inflation.
We argue that being precise and intentional in your pricing decisions will help you align your objectives with your prospects’ value drivers. By the end of this article, you will learn why a “one-size-fits-all” solution and across-the-board price adjustments don’t always fix profit drains that inevitably come with inflation.
As rising inflation is likely to last over the next several years, we ask, how can B2Bs efficiently categorise their customer base when it comes to tough decisions about pricing and generating profit?
What is Price Adjustment? How to adjust your Prices During Inflation with Precision Pricing
From a psychological point of view, precision pricing treats each customer base differently, pointing to the real current costs. It also gets to the bottom of a client’s profitability. This type of pricing system allows you to look into every aspect of production costs, which includes manufacturing, shipping, administrative costs, and discounts.
Moreover, it sets aside a record of your past success rates, client information, buying patterns, sales volume, and activities. These features can be integrated into your multichannel platforms to enhance customer convenience and satisfaction. This helps you identify price elasticity, or supply and demand factors, as well as which clients generate growth and differentiate them from those that are sources of profit drains.
Likewise, implementing any changes to the price of new or existing products or services will affect your overall sales volume. Since pricing maximises an organisation’s profitability, most customers believe a price correlates to the worth and value of a product or service.
What is price adjustment and its psychological impact?
For instance, a study shows that a price ending in .99 is perceived by customers that they are receiving a relatively lower price. It’s communicating the discount, even if it’s as small as a cent. In addition, the digit located in the leftmost part is what registers in the human mind rather than the digits on the right.
Then there’s the strategy of creating a sense of urgency, such as “buy one, get one free” or “one day sale, 50% off” promotional offers for a limited time. This is supposed to make customers feel like they shouldn’t miss out on a deal, and it would be a missed opportunity for them not to participate in the promotions.
If pricing has a huge impact on brand management, how can B2Bs use this to their advantage? As a business, how do you know the true cost of your products or services?
Well, you need to identify what your costs and profits are versus standard costs. This is because most prices are set by annual costs and not by each product’s costs or expenses. This only further blurs the actual cost of products and services consumed by buyers. Instead, most pricing teams and business leaders address this by evaluating pricing decisions based on key metrics that combine costs, margins, and revenue.
Enterprise Profit Management as a guide on how to adjust prices during inflation when defining what is price adjustment
EPM involves in-depth financial analysis of complex B2B markets. In fact, adopting this strategy drives company annual growth of as much as 10-30%. EPM provides accurate information that allows flexibility for pricing teams, taking digital management to another level, with features that automatically update your database on a monthly basis.
So, what exactly is price adjustment? EPM requires you to look into:
- Planning and analysing your finances or budget
This covers operations in each department, sales activities, and key metrics that track each department’s progress and success rate. Financial chiefs should supervise these tasks while working with sales managers, marketing, and pricing teams.
- Managing your Products, Services, and Suppliers
This requires you to investigate which clients and products are categorised as profit peaks, profit drains, and profit deserts (which accommodate low prices).
- Supply chain management
This includes shipping times and costs, which monitor delays and arrival times. What contingency plans are in place to address supply chain disruptions? Similarly, tracking your inventory and cost management is part of the task of serving your clients. Analyse how much competitors are charging for operational costs. Then check what changes and adjustments you can make from current market trends.
- Sales function
This involves planning your sales process when targeting your customer base, in which you understand your product differentiators quite well. It also should include a sales forecast that pinpoints where you currently are as an organisation and the numbers you want to reach. Of course, this involves in-depth research, data analysis, using the right tools, and trial and error testing of concepts.
When using EPM, there are 3 profit categories that your clients fall into:
Profit peaks usually generate high revenue and profit, which sums up the majority of total company profits. This type of client category will not be significantly affected by price increases in transportation and shipping costs.
Profit drains are high-revenue clients generating low-profit that affects about half of your total profit. They are profitable clients that consume products or services with a lower value. Any price adjustments that are effective will also significantly impact their expenses and purchases.
Profit deserts refer to clients who generate the lowest profit and revenue. They aren’t so obvious in most cases, but they often exist. They may seem subtle and insignificant at first, which is why examining your client category is crucial. Most companies realise this only when their accumulated losses become a major problem.
It can start off as frequent customer complaints, considering the optimised product quality, for instance. These clients might insist on not paying because of faulty products or services, demanding a replacement, refund, or even free after-sales maintenance without prior agreement.
One way to address this is to look into your expenses for customer service. If you spend more than usual, then this helps you identify which customers belong to profit deserts. you spend more than usual, then this helps you identify which customers belong to profit deserts.
On the other hand, if you seem to have too many customer complaints coming from different clients, then it’s time to consider innovation and improve the quality of your services. As long as you optimise your customer experience, then you can also minimise your expenses on customer service.
Bottomline – What is Price Adjustment? How to adjust the price during inflation
Precision takes a thorough approach to pricing, breaking down the actual costs and expenses of each item as opposed to summing them up on a monthly or annual basis. This helps you pinpoint where you can increase prices and which operational processes can be flexible and negotiated.
Knowing what to do for each B2B customer category is essential. For instance, terminating a profit desert, shouldn’t be the first step to addressing the challenge. Rather, there should be a renegotiation of actions first that will likely work best for both parties.
You will want to segment your target market and avoid a customer base that is majorly impacted by inflation and cost increases as much as possible. As you build partnerships and relationships, there must be a balance between profitability and profit risk. Regular evaluation and analysis of your P&L while employing enterprise profit management will keep you afloat despite rising inflation.
For a comprehensive view on integrating a high-performing pricing team in your company,
Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?
If so, please call (+61) 2 9000 1115.
You can also email us at email@example.com if you have any further questions.
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