Cost Increases and Profitability: How to Adjust Quickly

Alarmed salesperson chasing after money to illustrate cost increases in business
November 30th, 2021 0 Comments

When the market fluctuates in response to the current trading environment, it brings into sharp focus – for every business – the topic of cost increases and profitability. And it inevitably involves new decisions about exactly what costs you’ll have to pass on to your customers for your product or service – and when – in order to maintain your profitability.

So, how can you adjust to these changes quickly enough to maintain your profitability in the face of your costs increasing? We need to go back a step first and look at choosing initial prices for your product or service.

How to Set Your Prices Right for Profitability

Getting the pricing right from the beginning is the first step to maximizing your profits when market and cost volatility attacks. This step is therefore crucial. It requires more than calculating your cost and adding a markup.

1 Understand Pricing Strategies

There are several strategies you can follow. Obviously, the right strategy for your business is the one that delivers both higher profit margins and customer satisfaction. Common strategies include:

  • Value-based pricing: based on how much the customer believes your product is worth.
  • Competitive pricing: based on what other competitors with similar products are charging.
  • “Cost plus” pricing: based on the real cost of products and the markup.
  • Price skimming: setting a high price when a product is introduced and lowering it as the market evolves and competitors enter the market.
  • Penetration pricing: setting a low price to enter (penetrate) a competitive market and gradually increasing it later.

2 Be Clear on Your Business Financial Goals

The next step is understanding your business’s financial goals. That’s because business financial goals are dynamic. They change according to seasons, customer needs, market trends, etc. So, remember, goals are there to guide you to reach your destination. Being clear on your destination will help you set up the right pricing in the season that your business finds itself in today.

3 Know your Customers

Understand what your target customers’ unmet needs are and the value you can offer them. Analyzing who you’re targeting will give you insights into what they’re willing to pay for the value you’re bringing to the table.

Make sure your messaging communicates your benefits and values to these customers. You’ll need to align your thinking with their expectations so they perceive the benefits of what you’re selling. Customers today really are willing to pay for shopping experience, value, and sustainable, eco-friendly products. The more you align with their values, the more quickly you can raise your prices to offset cost increases that occur after the initial price setting.

4 Know Your Competition

If your products and services aren’t new to the market, competitive analysis will show you how your competitors price their products. The analysis will also help you discover opportunities available in the market. These might be unserved niches or needs that your business can tackle.

With this data to hand, you can then price your products in a way that

  • doesn’t set you too much apart from the existing market, or
  • shows you’re filling a perceived gap in terms of a unique product or added value.

When to Adjust Your Pricing to Offset Cost Increases

You know how to set up the right pricing, and you’ve set the initial price for your product. You may now be wondering when is the right time to adjust pricing in light of cost increases. Common reasons to adjust and raise prices include:

  • Inflation. Market inflation happens all the time. During these periods, it’s safe to raise prices in order to maintain profitability.
  • Increased costs. Production costs are not always the same. When they increase significantly, a company is most likely to raise their prices to offset the change in costs. This is acceptable.
  • When you’ve not raised your prices in a long time. This could have a negative effect on your customer base. That would especially apply if you sell products very cheaply compared to your competitors. But raising your prices after a gap can also give a positive message. You’re a flourishing business and are now providing better products and services!
  • When you’ve received competitive reviews. If you check out the marketplace, and your competitors are charging differently or more, you need to evaluate how this affects you. The information you collect doesn’t dictate how you price your products. But it does serve as a guide to determine what will work for you best.

How to Adjust Your Pricing Quickly When Necessary

There are several ways to implement price changes reasonably quickly to offset any cost increases in business. However, the way you go about it still has to be strategic so you don’t lose your relationship with your customers.

Pick the Right Strategy

Depending on the cause of the price increase, when introducing a price adjustment to the market, you have to pick the right strategy to ensure you don’t lose your customers. No customers, no business!

When you predict the need for a significant price increase, a wise strategy could be to gradually raise the price over a few weeks instead of making one large jump. Other strategies include

  • changing the amount of product (called “shrinkflation”) or
  • reducing some parts of your service offering to keep the original pricing.

Pick the Right Time

Timing is important before making financial decisions in business. Price rises are normal, but you have to pick the right time to implement them for best benefit. If possible, choose a time when you’ll receive the least backlash and get the most impact from the change.

The right time also depends on the status of your business’s seasonality and growth stage.

Find a Way to Add Value

Even when you have to raise prices quickly due to significant cost increases that haven’t been within your power – like market fluctuation, or a pandemic pushing supply chain costs up – you have to find a way to add value to your products and services to maintain customer loyalty. Price is always justified by the value you attach to your product, so you should make the necessary value upgrades just before raising your prices.

Communicate With Your Customers

Rather than leaving your customers to guess the reasoning behind your price increase, make sure you communicate properly with them. You can do so by having a marketing plan that includes, for instance, social media or email.

This will communicate price rises and reasons to customers. Listen to their feedback and respond to it, if possible, to improve your value-add. Modern customers expect to talk to businesses and be heard. No communication, no customers. Keep them onside.

Plan Ahead

Before thinking of raising prices – even in a hurried situation where you need to move pretty quickly to survive in business – make sure you’ve analyzed and considered all factors about the change that could affect your business in unforeseen ways.

By planning ahead to be adaptable, you can deal with both roadblocks and possible collateral. And knowing the full picture will help you stick to your plan and implement the new pricing. You don’t want to leave these considerations to the last minute because that could cost you more than the cost increases you were trying to mitigate against.

Different Ways to Structure Your Price Increase to Offset Cost Increases Quickly

1 Increase prices by adding fees. Customers are happy to pay additional fees as long as they’re accounted for. This is a good strategy when there’s a surge in specific costs such as transportation or your necessary raw materials. So instead of raising prices for your actual product or service, communicate with your customers about the need for changes and add the fee to another area of the supply chain like delivery fees, etc.

2 Introduce the higher prices in stages. When there’s a sudden cost increase, raising prices immediately may be a shock to your customers. This may be the quickest way to offset your cost increases but it can be damaging enough to lower your quarterly turnover. To maintain a better relationship with your customers, consider raising prices for a small group of clients first to see how they react, or increase the prices incrementally to minimize the effects.

3 Add value. As we’ve indicated above, this is the most successful way to increase price points. Customers are willing to pay much more as long as they see the value and benefits that the product or service has for them. So, if your company has to increase pricing to stay profitable, start by adding value and worth to the product or service features. These should be ones that don’t cost a lot but which make a big impression on the customer.

4 Raise prices on popular products or services. Popular products and services will always sell more – thus demonstrating that they already add more value to your customers than other products do. Raising prices strategically on these products can have a significant effect on your income and profits.

5 Create a lesser or better option for every customer group. This is the most successful option for service-based businesses. You simply create various differentiated plans that include more tailored services for those who need more and are therefore willing to pay more. For example, extra gigabytes from a cloud service, or high postage charges for more specific delivery slots.

Increase Your Profitability When Costs Increase

There are many other strategies to consider in order to widen your profit margins. No matter what happens, every business can increase their profitability despite increases in costs.

However, how you increase your business profitability will depend on a number of factors such as the location of the business, the industry, or its normal operating costs. Below are some of the options you can review.

  • Increase your sales staff productivity: The best resource any business has is its sales staff. When properly trained, they can bring in new customers. Contribute to staff satisfaction by rewarding them when they reach their targets and when they go beyond their job description. Empower them with new skills and techniques by giving them access to knowledge pools and educational seminars and training.
  • Develop new product lines: Send out surveys to your existing customers to understand them better and see if you can develop new product lines.
  • Expand your market: Research for potential new locations and new customer bases that you can expand your business into. With a larger audience, you can minimize the effect of cost increases.
  • Reduce cost of operations: Instead of finding ways to increase your prices, increase profit by finding ways to streamline your operations in a way that reduces cost. One way you can do so is by automating some of your processes (a slower solution). Another is to increase your use of IT (a quicker solution) by, for instance, adopting virtual selling.
  • Improve your customer service: Train your staff to treat your customers with respect and approach them with a positive attitude. Customers like to feel good when they’re spending money, and they are likely to remain loyal when they’re treated well by your staff and other team members.
  • Review your vendor relationships: Who you buy from and who you partner with have a significant role in pricing your products. Understand your key cost areas and find out how you can best negotiate better contracts – especially with your suppliers. You can help manage cost volatility by strategically changing supplier in today’s competitive world.

In Summary

Adjusting to cost increases quickly enough to stay profitable is not easy. But a knee-jerk reaction is not the way forward. Change is here to stay and it’s obvious why “adaptability” has become a buzz word in the business world!

So, carefully considering each of the points we’ve made is a good way to pinpoint exactly where you can introduce changes to your pricing to cover your increases in costs without losing your competitive edge.

At Waterways, we’re about much more than water coolers! We have years of experience in sales and pricing and would love to help you solve any possible problems as your costs increase. Connect with one of our industry professionals to develop the best plan to keep your business moving forward efficiently!

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Article Name
Cost Increases and Profitability: How to Adjust Quickly
Learn how your business can set correct pricing at the outset, and know when and how to adjust it to cover cost increases – and even increase your profitability using strategies that add value or adapt your offering.
Business Challenges
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