Businesses increase prices to protect profit margins, recover rising costs, capture customer value, and respond to changing market conditions. During inflation, a data-driven price increase helps businesses determine where higher prices are justified based on customer value, price sensitivity, demand, and market conditions.
Key Takeaways
- Businesses increase prices to protect profit margins, recover rising costs, capture customer value, and respond to changing market conditions.
- Data-driven pricing helps businesses identify where price increases are justified and minimise the risk of losing customers or sales.
- Blanket price increases can backfire when they ignore customer value, price sensitivity, and differences between products or customer segments.
- Strong value propositions matter when raising prices, particularly when customers are already under pressure from inflation.
- Pricing, customer, market, and commercial data can help businesses make more informed price increase decisions and protect profitability.
A 2014 McKinsey study found that a 1% increase in price can increase operating profits by 8.7% on average, assuming demand remains constant. This highlights why pricing can be such a powerful lever for profitability, but businesses still need to understand customer value, price sensitivity, and market conditions before implementing an increase. This helps explain why pricing can be such an important consideration for businesses across sectors, from service-related businesses to ticket sellers, cruise lines, and FMCG companies. But profitability is only one reason businesses increase prices. What other factors should they consider?
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.
>Download Now: Free PDF How to Build Hiring Capability to Get The Best Pricing Team
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.
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 through pricing. We focus on 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.
How Data Supports Better Price Increase Decisions
Businesses increase prices for several reasons, including protecting profit margins, responding to rising costs, capturing the value of their products and services, and adapting to changing market conditions. During periods of inflation, price increases can help businesses offset higher costs, but simply passing those costs on to customers can create risks.
A data-driven price increase helps businesses make better decisions by:
- Identifying where a price increase is feasible: Data can help businesses understand market conditions and determine where prices may need to change.
- Understanding customer value and price sensitivity: Customer insights can show which customers are more likely to resist an increase, leave, or continue purchasing.
- Protecting margins and revenue: Better pricing decisions can help businesses respond to rising costs without unnecessarily sacrificing sales or profitability.
- Strengthening the value proposition: Data can help businesses identify what customers value and determine how their products, services, and branding support a higher price.
- Reducing the risk of blanket increases: Rather than applying the same increase across products or customers, businesses can use pricing and customer data to make more informed decisions.
The reason for a data-driven price increase, therefore, is not simply to charge more. It is to make a better-informed pricing decision that protects profitability while considering customer value, demand, and market conditions. The effects of inflation provide an important starting point for understanding why businesses are under pressure to reconsider their pricing strategies.
By the end, you will know the various ways data insights can ensure that your price increase will be effective to offset inflationary pressures.
Capability Building Programmes For Pricing & Sales Teams!
How Inflation Creates Pressure to Raise Prices
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 slimmer profit margins
As prices rise, consumers generally reduce their spending, although the impact varies by product and customer segment. 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 mentioned, 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.
Why Businesses Struggle to Plan Price Increases
1. COVID-19 pandemic
According to a February 2021 Australian Bureau of Statistics survey, 41% of businesses were significantly impacted by COVID-19 restrictions. Unexpected challenges hurt many aspects of business operations. These include 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 in 2022 caused significant disruption to businesses and global energy markets. In fact, numerous raw materials, energy, intermediate products, and transportation services experienced significant price increases.
3. Internal inefficiencies
Internal inefficiencies can also make it harder for businesses to develop and implement effective pricing 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 accelerate most companies’ strategies by improving operations and empowering those who must carry them out.
How Strategic Price Increases Can Support Business Growth
1. Strengthening Brand Positioning
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 increase and using value-based, customer-focused pricing rather than applying cost-plus markups across all products. Businesses should also track customer responses, feedback and price sensitivity, then use this market and customer intelligence to refine future price decisions.
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, including both their experienced and perceived value. 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 wholesaler 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. Influencing Demand and Price Sensitivity
Strategic price increases can provide businesses with greater insight into demand and customer price sensitivity over time. Low price sensitivity can indicate that customers are highly motivated to purchase a product despite changes in price. Understanding price sensitivity, customer attitudes, and perceptions can help pricing teams adjust prices in response to market conditions and business needs while reducing the risk of unnecessarily losing sales.
Why Blanket Price Increases Can Backfire
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. Flat price increases can quietly cost you your most valuable accounts, particularly when customers do not see enough additional value to justify the higher price.
Why Inflation Is Straining Pricing Decisions
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 provides critical information when deciding your price increase strategy.
Taylor Wells’ findings show that businesses can generate at least 3–10% additional margin each year by building and embedding commercial capability. Strong internal pricing skills and capabilities can help protect hard-earned revenue and volume while creating a more sustainable pricing system. 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.
How to Use Data When Planning a Price Increase
1. Use Data to Explain Why Prices Are 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. Use Data to Strengthen Your Brand Positioning
Use data to determine what type of branding will appeal to your existing and prospective customers. When budget retailer One Below, now OneBeyond, raised its prices, it modified its catchphrase from “everything ÂŁ1 or less” to “4,000 products ÂŁ1 or less,” and now that its prices have risen even higher, with almost all products costing ÂŁ1 or more, it has completely rebranded as One Beyond, with the strapline “Amazing value from only ÂŁ1.”
The rebranding of One Below to OneBeyond, along with the announcement of a price increase, was 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 the changes were executed under the old proposition and brand.
Pricing Recruitment For Pricing Managers!
3. Strengthen the Value Proposition Behind Your Price Increase
Customers are more likely to resist price increases when they see little additional value behind them. Price increases must be accompanied by a level-up on your value proposition. Failure to do so results in a 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 can help businesses determine which offers customers value most and how those offers can support a 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. This allows them to identify more complex and previously unrealised opportunities, efficiencies, and risks.
What Data-Driven Pricing Means for Business Strategy
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.
〉〉〉 Get Your FREE Pricing Audit 〉〉〉
The Bottom-Line Case for Data-Driven Price Increases
Price increases are not simply a response to rising costs. They are a commercial decision that requires a clear understanding of customer value, price sensitivity, demand and market conditions. By combining pricing, customer and commercial data, businesses can identify where increases are justified, protect profitability and reduce the risk of losing valuable customers.
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.
You can also email us at team@taylorwells.com.au if you have any further questions.
Make your pricing world-class!
