How A Data-Driven Price Increase Drives Earning Growth During Inflation
A study found that many businesses can increase their profits by raising their prices by as little as 1% to 2% when backed with quality data, proper assessments, and implementation. This must be why price increases across the board are rampant in the past few years, from service-related businesses, to ticket sellers, to cruise lines, to FMCG companies. But aside from the additional profit, what is the reason for the price increase?
Inflation creates numerous problems for both businesses and consumers. Inflation affects each business differently. Their experience is largely determined by the nature of their market, the products and services they offer, and the power of their brand. Regardless of the magnitude of the impact, many organisations are weighing their options for passing on price increases to their customers.
Strong inflationary pressures have caught some off guard. Consequently, there are businesses that do not have the right strategies and pricing plans in place to make profitable price increases. What’s more, the problem of high inflation is not going away anytime soon. Analysts believe that this period of inflation won’t be short-term.
Businesses need now more than ever to build the required internal commercial capability to combat rising costs without losing customers and facing profit decline when implementing price increases.
In this article, we are going to discuss actions commercial executives and management teams can take to help them safeguard their profit margins against rising inflation using price. We focus on what is the reason for a data-driven and strategic price increase. We argue that simply passing increased costs onto the consumer could backfire if you don’t understand what they value and their price sensitivities.
At Taylor Wells, we believe that price increases should be given much thought and decisions must be backed by data-driven evidence. By the end, you will know the various ways data insights can ensure that your price increase will be effective to offset inflationary pressures.
What Is The Reason For A Data-Driven Price Increase Amid Inflation
What are the most common negative effects of high inflation on businesses?
1. Increased cost of raw materials
As inflation persists, everything a business uses to manufacture a product or provide a service will almost certainly cost more. However, the effects are not universal for all companies. The raw material prices of any given business will be determined by the market’s supply and demand characteristics. For example, if a company’s inputs come from a foreign country with higher inflation, the costs and prices will be impacted and will differ from those in the home country.
2. Disruptions of supply chains
Inflation and supply-chain disruptions frequently occur concurrently, so businesses should have a plan in place to deal with both. When supply chains are disrupted, enterprises cannot obtain enough inputs. Prices rise due to a lack of supply. And businesses will have to pay more for products that are essential to their operations.
3. Decline in sales and slimmed profits margins
It is already expected that as prices rise, people will buy less. This reduced consumer demand has repercussions all across the economy. However, the effect is not spread fairly. Some products, particularly those that are essential, will see no or only a minor drop in demand. The majority, on the other hand, will see a decrease as consumers reevaluate their spending. For businesses selling discretionary goods and services, for example, demand may continue to decline during prolonged periods of inflation.
4. Higher interest rates
Interest rates rise in tandem with inflation. This is because interest rates are the primary tool used by central banks to combat inflation. In contrast for businesses, higher interest rates translate into a higher cost of borrowing for working capital and for investing in the company’s future endeavours.
5. Slow growth
As previously said, borrowing money becomes more expensive during times of high inflation, making it more difficult for a business to invest in its future. The link between inflation and employment is also complicated. Some people believe that high inflation reduces job opportunities. Others believe that inflation and employment rates rise and fall at the same time.
What is the reason why businesses are struggling to strategise for a price increase?
1. COVID-19 pandemic
According to a recent survey, 41% of businesses have been significantly impacted by COVID-19. Unexpected challenges hurt many aspects of business operations. This includes the risks to human resources posed by rising mortality and unemployment rates. The pandemic undoubtedly caused an economic downturn because people were unable to carry out normal production, distribution, and consumption activities.
2. War in Ukraine
Russia’s invasion of Ukraine is primarily a humanitarian disaster. It is also causing havoc in businesses all over the world. In fact, numerous raw materials, energy, intermediate products, and transportation services have seen significant price increases. Fuel costs, for instance, have more than doubled, while gas prices have tripled.
3. Internal inefficiencies
Because of internal inefficiencies, most businesses continue to struggle to develop strategies. Some businesses lack technical skills and have unrealistic cultural expectations. Others are resistant to change or are unwilling to integrate new technologies. This stifles progress. For example, data analytics may help to accelerate most companies’ strategies by improving operations and empowering those who must carry them out.
What is the reason why a price increase can help alleviate the struggles of businesses?
1. Rebuilding the brand
Branding has always been an important aspect of a business. Because there is so much competition nowadays, businesses must go above and beyond to ensure they stand out. Businesses can improve their branding by strategically raising their prices. This means selecting the right brands and products for a price rise. Using sophisticated value-based and customer-focused price-setting logic – not cost plus markup across all products. Tracking customer responses – verbatim and price sensitivity data. Feeding market and customer intelligence back into all price rise decisions – and constantly tweaking, iterating and improving.
In the face of high inflation, when many people are hesitant to spend, some are prioritising getting the most value for their money. While most are spending less, some are willing to pay more for higher quality that will last longer and produce better results.
2. Highlighting value propositions
A value proposition is what makes your products or services attractive to your customers. It is based not on your view of your value, but rather on your customers’ view of your value i.e. both experienced and perceived. On top of this, there are other psychological pricing factors to consider as well. For example, consumers at the end of the value chain often associate higher prices with higher quality and value. As a B2B wholesale or manufacturer, how does this impact your price rise strategy? Price increases can be used as a marketing tool to showcase your value propositions, whether they are pre-existing or new.
3. Opportunity to boost demand and influence price sensitivity
Yes, price increases can help boost demand and reduce price sensitivity in the long run if done strategically. Low price sensitivity can indicate that customers are highly motivated to purchase the product regardless of price and cost. Understanding price sensitivities and customer attitudes and perceptions enable pricing teams to easily adjust prices in response to the market, economy and your company’s needs without risking a drop in sales.
Discussion On What Is The Reason For A Data-Driven Price Increase
Despite the benefits, simply passing on higher costs to the customers may cause a backlash if you don’t realise customers’ price and value predispositions. Price increases, if not done correctly, may cause more harm than good. For example, some businesses that raise their prices harm their reputation and lose a significant number of customers. Hence, price increases should be carefully considered, and decisions should be supported by data-driven findings.
What is the reason for a data-driven price increase?
Insights from data analytics assist businesses in predicting trends, identifying opportunities, and staying ahead of the competition. Data insights provide greater clarity and perspectives to help you make more educated business decisions. The latest research highlights the importance of gathering information to identify where a price increase is feasible and where your company may need to be in line with the market. Understanding your customers and who will resist or leave you is critical information when deciding your price increase strategy.
Companies can maximise the benefits of data when they have strong commercial capabilities. Our findings show that when a business builds and embeds commercial capability across the business; bolstering its internal pricing skills and capabilities to build a sustainable pricing system, it can generate at least 3-10% additional margin each year while protecting hard-earned revenue and volume. This is at least a 30-60% profit improvement straight to the bottom line.
Price increases are always fraught with risks. This is certainly relevant when consumers have relished years of price stability. As such, before you change your prices, take a close look at your customer base.
What is the reason and the best way to integrate data insights with a price increase?
1. Use data to establish price transparency about why are prices increasing
When you have reliable data insights, you can be confident in communicating price increases. And, whenever there is a price increase, it is critical to communicate the reasons for it. Explain your reasoning clearly. This discussion should take place as part of a larger discourse about overall service and business strategy, rather than just about the price increase. Specialists advise business leaders to be as open as possible with stakeholders and customers. Offering consumers prior notice of price increases is a good example. Price changes must also be strictly regulated and, if necessary, quickly adjusted.
2. Consider rebranding to justify why your prices are increasing
Use data to determine what type of branding will appeal to your existing and prospective customers. When budget retailer One Below raised its prices, it modified its catchphrase from “everything £1 or less” to “4,000 products £1 or less,” and now that its prices have risen even higher, with almost all products costing £1 or more, it has completely rebranded as One Beyond, with the strapline “Amazing value from only £1.”
The rebranding of One Below to One Beyond, as well as the announcement of a price increase, were not by chance. It was well-thought-out and strategic. Customers would have been more likely to reject One Beyond’s recent price increase strategy; and lose trust in the brand, if they were executed under their old proposition and brand.
3. Strengthen value proposition as to why your prices are increasing
Customers hate businesses that only focus on money. Price increases must be accompanied by a level-up on your value proposition. Failure to do so results in loss of customers and therefore, slimmer profit margins. So, to increase prices without losing customers, you have to remind them why they started a relationship with you. Data insights will become beneficial in determining what valuable offers you can give to your customers, and how they can work with your price increase.
To make your price increases more profitable, build a specialised pricing team within your organisation. Our findings show that with the right set-up and pricing team in place, incremental earnings gains can begin to occur in less than 12 weeks. After 6 months, the team can capture at least 1.0-3.25% more margin using better price management processes. After 9-12 months, businesses often generate between 7-11% additional margin each year. As they identify more complex and previously unrealised opportunities, efficiencies, and risks.
Implications On What Is The reason For Data-Driven Price Increase
Marketing, branding, and pricing are all strong business forces that shape customer perception. Hence, businesses must take their time strategising how these three key factors can function efficiently together. This period of inflationary pressure presents an opportunity for businesses to reconsider their pricing strategies and maximise margins by understanding the value of their products and business.
Bottomline: What Is The Reason For A Data-Driven Price Increase
This article discussed how business leaders can protect their profit margins from rising inflation. We highlighted the advantages of data-driven price increases. Businesses must always remember that price increases are unavoidable, even when inflation is low. Customers can accept this and will continue to buy products and services as long as they believe they are valuable. Leaders must initiate the transition to data-driven operations, not only in pricing but also in marketing and branding. In this regard, data can aid in rebranding, improving value propositions, and reducing price sensitivity.
For a comprehensive view on integrating a high-performing pricing team in your company, Download a complimentary whitepaper on How to Build Hiring Capability to Get The Best Pricing Team.
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.
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