The 2020s continue to throw businesses into new and challenging situations.
The economic landscape in Australia is pointing towards higher costs for the foreseeable future: the CPI is predicted to peak at 7.75% at the end of this year, and the Reserve Bank’s efforts to curb inflation mean that interest rates will likely continue to rise.
While the government is doing its best to combat the growing economic tensions and skills shortages, business owners should be preparing accordingly – including a proactive approach to reviewing and updating their pricing strategies.
This was the topic at this quarter’s Referral Lunch, where align.me’s business partners and referrers gathered to learn how to price in an inflated environment. Special guest Jon Manning from the Pricing Prophets shared actionable tips and strategies, and business leaders put their heads together to share their own ideas for pricing.
The three tools needed to manage your pricing
The pandemic has triggered a 3-stage economic crisis for businesses where they had to:
- adapt their business model to the new environment (lockdowns, no-contact shopping, virtual service delivery, etc);
- find ways to recoup the investments made in support of the new business model; and
- scramble to adjust their pricing after the pandemic grace period ended and costs continued rising.
Business leaders in attendance agreed with this and noted that staffing costs and supply chain uncertainties are the biggest challenges to their business – and these must be offset in other ways to ensure that profits are still being made.
Jon’s expertise came in handy as he shared insights from his recent whitepaper into the different pricing strategies and models businesses should be using to stay ahead of rising costs:
Why cost-plus pricing is counter-productive
One pricing strategy that is letting businesses down is cost-plus pricing, where companies simultaneously use rising costs to increase prices while concurrently trying to manage a ballooning cost base. While managing costs this way keeps businesses profitable, it takes revenue and expenses in different directions when combined with cost-plus pricing.
And with 70-80% of businesses in Australia using the cost-plus pricing model, this is putting millions of businesses at a disadvantage. Instead, separate cost management from pricing management, and complement it with behavioural economics to manage prices, set prices, and get prices.
So how do these three come into play?
Cost management involves:
1. Understanding the dynamics of your cost base
2. Eliminating unnecessary costs
3. Review your working capital
4. Effectively communicate these changes to your customers
Pricing management allows you to explore more creative pricing strategies such as:
- Segmenting price
- Running timed promotions
- Considering dynamic pricing
Behavioural economics considers the irrationality of humans and provides you with opportunities to experiment with:
- Visibility of discounting
- Decoy products
- Goldilocks models
Jon dives deeper into each of these methodologies and shares further strategies & successful business cases in his whitepaper, ‘Managing the Schizophrenic Role of Costs in your Business’. You can download it below to discover actionable ways to adjust your pricing:
Expanding upon these insights, align.me welcomed 38 business leaders representing a range of vertical specialisations and business sizes but who share a common thread in that they have utilised and then referred align.me to others. We are immensely grateful for their support and contributions.
How to communicate cost-driven pricing increases
Participants split into six groups to formulate ideas and then share their strategies for minimising customer leakage during increasing prices. The first topic was how to communicate price increases without losing customers, tackled by groups 1 and 2.
- Timely communications are key. There should be no surprises for your customers
- Consideration should be made to your customers’ budget cycle when making the increase – try to meet your customers where they are. It’s a 2-way street, so you should try to make it as easy as possible for your customers to accept the increase. For example, increasing your prices nine months into the year isn’t practical
- When possible, customers should be contacted personally as that shows appreciation and respect for their loyalty
- Communicate on the same level – e.g. CEO to CEO. This evens the playing field and increases goodwill on the customer’s part
Framing the conversation:
- Communications should preserve and elevate the value of your product as much as possible
- Be open, honest, and approach from multiple fronts depending on the customer and the business
- Share challenges not to justify the increase but to start a conversation
- Focus on the smaller number – for example, not on the increase from (for example) $15k to $20k but on the $5k difference
How to execute optimised pricing
The second topic invited Groups 3 and 4 to strategise on how to optimise pricing without losing customers – and some creative (and even sneaky!) pricing strategies were shared.
- Let your competitors increase their prices first so that no one will bat an eye when you do. You can also learn a lot from the reaction your competition gets or even their communication strategies, all valuable insights to have when planning your own increase
- Understand your business’s position in the market and let that guide your increase and communications – how will your customers react and what will they accept?
- Know your business’s data. Where can you give ground? Where can you increase prices further to compensate for lost ground? Understanding your business’s current financial state inside and out will mean you can optimise your pricing effectively
Structuring your increase:
- Incrementally increase where global events function as triggers for increases. Instead of increasing prices 10% at once, increase them strategically when it’s more expected and palatable
- Consider a standard vs extra model, where extra services or allowances can differentiate pricing to give customers more chances to pay what they can at the time. After all, it’s cheaper to keep customers than to gain new ones, so loyal customers should be prioritised
- Build in the increase as a surcharge to disassociate your business from the increase
- Try grandfathering – keep your price the same for current (or long-term) customers while increasing it for the new ones
Empower your people:
- Prepare your people – your sales and customer service staff will be communicating with customers the most, so they need sales enablement materials to help guide conversations, offer compromises, and smooth things out for customers.
How to optimise emotive responses to pricing changes
Understandably, some customers won’t be prepared for a price increase, or perhaps they might find it difficult to accept when all their other service providers are increasing prices simultaneously.
Our last two groups discussed how to ensure that your customers take the increase well.
- Recognise shared experiences and successes as a way to move forward. B2B product and service lifecycles are longer, meaning you’ve been with your customers for a while. You have the history and the shared wins – use these to capitalise on nostalgia and built-up goodwill
- Build further goodwill by giving advance notice, being prepared to negotiate, and offering flexibility where possible. Again, this is all about keeping your current customers
Know your value:
- Have customers visualise the future state of their business with your services to help communicate the value your product or service brings to them
- Change the narrative and look at pricing increases as an enabler for customers to invest in you and improve their journey with even more success is an effective technique.
Weave a narrative:
- Get your customers to visualise life without your product or service to reinforce the value they receive from it. A before and after is a great way to show what has been achieved through your partnership. Even sharing a product roadmap for the future will help customers visualise what’s ahead for them
- Use personalised language in communications to ensure customers feel important and cared for. Stale, dry, or copied and pasted messaging is a sure way to turn customers off, especially those you have close relationships with
How to set yourself up for success in your meetings
With the need to communicate any changes crucial to success, we were fortunate to have Christina Bruce of Sellabilities, a leading sales training consultancy, as an attendee. We invited Christina to centre stage to give some pointers on effective sales communication with clients.
For either face-to-face or Zoom calls, Christina advised:
- Keep your body language present:
- Avoid leaning back or pushing away from your desk / PC – this puts physical distance between you and makes it seem like you’re no longer interested
- Make sure to keep consistent eye contact – otherwise, you look like you’re avoiding or hiding
- Don’t get distracted by whatever is happening outside your window – it’s obvious when someone is no longer paying attention to the conversation
- If you do notice your client or customer breaking away, use their name to bring them back in
- If it’s clear that they’re not happy or want to say something, invite them to do so – “Is there something you want to raise?” and
- Don’t be afraid to get their commitment – sometimes, you must be explicit in asking your customers to stay with you.
And one last great tip:
Christina shared a tip from Adam Grant’s podcast that her whole team now follows – when you walk into a physical meeting, touch the doorway to remind yourself to be present in the physical space.
Equally, if you’re going into a virtual meeting, discover your own virtual doorway to bring yourself into the environment and commit to the conversation you’re going to have together – and encourage your client to do so as well.
Keep pricing at the forefront
Pricing strategy should always be a priority given the link to profitability, but even more so in an inflationary setting.
This most recent referral lunch was the most successful yet, in part due to the timeliness of this discussion. Australian business leaders are keen to innovate and stay on top of trends and strategies.
We want to thank Jon and Christina for their contributions and our valuable clients and partners for their insightful conversations.
These lunches provide a great space to share knowledge, create value in return, and generate further networking opportunities – all as a way to thank the people who continue referring us to their network.