Getting your pricing right is an essential part of running a profitable business. But over time there are many factors that can change the conditions of the market you operate in.
As your business grows, so do your costs. More staff, bigger volumes of demand and marketing costs are among the reasons why your bottom line might be shifting as you expand.
Having an effective strategy in place to review and implement your pricing can be paramount to your success, but there are many things you need to consider.
To help you develop a repricing strategy, we’ve laid out a five-step process to make sure you are maximising the output of your business.
Step 1 - Evaluate
Before rushing in, it’s critical that you first evaluate the need for repricing your business. And if you do need to, why?
Changing your pricing can have a big effect on your brand and the demand on your product, so this decision cannot be made lightly.
Ask yourself what is driving your thoughts around repricing. Have your expenses increased or did you make a mistake at the beginning? By pinpointing the specific needs for change, you can make informed decisions when formulating a business growth strategy.
Leaning on your accountant or numbers person is a good way to get a better understanding of your costs and financials. From here, you can identify what is and isn’t working, and evaluate what changes to your pricing might be necessary.
Before you proceed any further, you’ll need to be able to answer the following questions:
- What are the total costs of running my business?
- Am I struggling to attract business?
- Am I struggling to generate a profit?
- Where do I want to position myself on the market?
- How are my customers/clients likely to react to any prices changes?
- How is my business likely to change in the future?
- What are my end goals for the business?
Step 2 - Research and analyse
Once you’ve got a better understanding of your own business, you’ll need to research your competition and the market in which you operate.
Find out what other companies charge for similar products or services, and how the pricing in your market has evolved. If your competition has increased their prices, your customer base may be more understanding if you do the same.
You’ll then need to determine where your business sits in the market and the value your customers place on what you provide. The experience and expertise you accrue over time may have raised your value and might warrant a higher pricing structure from your business. If consumers cherish what you offer, they’ll still be inclined to pay more for it.
Equally, newer and smaller businesses might find that offering lower prices is their best way of positioning themselves amongst their competition.
This is the constant balancing act all companies face; optimising the profits you make versus staying competitive in the market. That’s why its critical to know what your product or service is worth and how much the market is willing pay for it. A continuous customer feedback channel can be a great way of understanding the value they place on your business.
You should also be identifying the price fluctuations in your market and how they might affect your business. Seasonal and economic cycles can influence your profitability and should be factored into your decision making.
Step 3 - Develop
Run all the numbers? Done the research? Now is the time to review and adapt your current pricing strategy to maximise the benefits of your hard work.
Assessing your pricing model can be an important part of ensuring you are charging effectively for your business. The most common pricing models used are typically the following:
- Cost-plus pricing - Involves adding up all of your costs associated with producing a product/service and then adding on the profit that would make delivering it worthwhile.
- Value-based pricing - Involves basing your pricing around the perceived value of your product/service and what the market is willing to pay for it, rather than how much it costs to produce.
- Hourly pricing - For businesses offering services, this model involves putting a price on an hour of your work, and then charging your client for the amount of time you spent working for them.
- Fixed pricing - Involves charging a set price for services, regardless of how much time or costs are associated for each task.
If you’re increasing prices for your business, it’s important to consider the impact that this could have on your customers.
A significant jump could offset some of the goodwill you’ve banked up and slow the momentum of your business. Developing a repricing strategy that involves incremental changes is often an effective way of keeping up with your growth whilst maintaining a positive brand.
When in doubt with what you should be charging, aim to keep your customers happy and loyal, rather than chasing short-term profits.
Your repricing strategy should be agile and open to changes, but also be clear to both you and your customers.
Step 4 - Implement
Now that you have your repricing strategy, it’s time to implement it.
Clear communication with your customers is crucial when repricing to ensure everyone is onboard. Sneaking price hikes into an invoice can be a great way of putting a client off your business. Once they’re gone, they’re very hard to get back.
Sending an email to your customer base well before a price increase is a good opportunity to prepare them for the change and to justify your reasoning for it. This is your chance to assure them that the increase is to help maintain the quality of your product or service.
Keep in mind, consumers are generally understanding when a business undergoes repricing, but only if they feel they are still getting value for their money.
It is important that your staff are also clear on the rationale behind any changes, so they can effectively justify your decisions to the customer. Sustaining direct channels of communication with your customers or clients will help keep them onside and allow you to track the response to repricing.
Step 5 - Monitor/Review
Once your new pricing strategy is in place, it is important that you continually monitor and review the results.
Your accountants will be a powerful resource when assessing the performance of your business so lean on them when you can. Identifying what is and isn’t working will help you determine what alterations might be necessary in the future.
If you’ve lost a substantial portion of your customer base as a result of the repricing, it might be worth tinkering with your approach. As a general rule: more customers means more profits, so strive to protect these relationships.
An effective pricing strategy will help you plan ahead but even so; remain nimble and be ready to adapt to the evolving nature of your business and the market.
Staying informed and proactive is your best bet to maximise the performance of your business.