What pricing strategy should you adopt in uncertain times?
Energy prices, supply chain volatility, exchange rates and tariffs are among the many factors putting pressure on business costs in a complex geopolitical environment. The high inflation seen after the pandemic has given way to less intense but persistent pressure, signalling a structural change.
As your costs rise, what pricing strategy should you adopt?
Even if your customers are aware of the economic challenges, repeated price increases could test their patience. They may have already reached the limit of what they’re willing to pay.
“Take this opportunity to review your offering, better understand your customers, improve your processes, and adapt your communication,” suggests Louis Bernier, Senior Business Advisor with BDC Advisory Services.
“Pricing isn’t just a marketing decision. It’s a business decision. It lies at the intersection of finance, operations and the customer experience.”
Before even considering a price increase, you need to understand the value you create, how your customers perceive it and whether you can clearly demonstrate it.
Pricing decisions require as much analytical rigor as they do human judgment. Pricing strategy remains one of the few levers that can simultaneously influence growth, profitability, operational efficiency and the customer experience.
Louis Bernier
Senior Business Advisor, BDC Advisory Services
Am I in a strong position to raise my prices?
Pricing is more complex than simply choosing whether to raise or maintain prices, notes Bernier.
“The most common mistake is basing the decision on rising internal costs. The most successful companies place greater emphasis on the value they create for their customers.”
Do you understand what drives your customers to choose you? Start by assessing the strength of your value proposition by answering the questions in the VRIO model.
- Value: Does your offering meet an important need for your customers?
- Rarity: Can only a few other companies offer the same thing?
- Imitability: Is it difficult for competitors to replicate your advantage?
- Organization: Is your company structured to deliver this value consistently?
The more often you answer “yes,” the more feasible a price increase becomes, especially if your costs are increasing over the long term. However, if you operate in a market where products or services are very similar and customers are highly price-sensitive, proceed with caution.
Also, make sure your customers share your view of the value you provide. How do they describe your products and services? What do they think of your customer service? Survey them regularly, and don’t limit communication to negotiations or transactions.
“Take the time to talk to your customers and ask them what you’re doing well and where you could improve,” recommends Bernier. “If customers see value, they won’t argue over the price.”
How can I absorb my costs without raising my prices?
“When a supplier raises its prices, the instinctive reaction is often to immediately pass that increase on to customers,” notes Bernier. “However, it’s worth exploring other solutions before making that decision. Can I improve my operations? Can I review my cost structure?”
Whether or not you have the flexibility to raise your prices, a good understanding of your costs will help you identify savings. Bring your entire team together to explore the following options.
1. Identify sources of inefficiency
Investing in automation to improve your productivity is a solution that will pay off over time. However, businesses of all sizes can also find opportunities to improve in the short term:
- reduce non-value-added activities
- optimize inventory
- review administrative processes
- reassign roles and responsibilities
- reduce operational errors and rework
2. Clarify your discount policy
Discount management is another often-overlooked opportunity.
“Many companies closely monitor their procurement costs but are less familiar with the discounts they offer their customers,” notes Bernier. “Make sure you have a clear internal policy on discounts.”
For example:
- Who can grant a discount?
- At what threshold must sales teams obtain approval?
- Do you reward sales volume or profitability?
- Do you offer the same commission rate for a new account as for an existing customer?
- Are payment terms factored into the discounts offered?
3. Focus your efforts in the right place
Regularly reassess your portfolio of products and services. Some companies find that a small portion of their offerings generates most of their profits. If this is the case for you, focusing your sales efforts on that portion of your offering can produce the same results as a price increase, without the associated drawbacks. Ask yourself:
- Which customer segments are most price-sensitive?
- Which products, services, or customer segments actually drive your profitability?
How can you raise your prices while protecting your sales?
If you feel you need to raise your prices, first check whether you have a service agreement in place with your customers. If not, consider establishing one.
Does the agreement include an inflation-indexation clause? Even if you’ve never used it, it can serve as a starting point for the discussion.
This discussion may also give you an opportunity to revise payment terms and deadlines, review your product mix or secure a specific sales volume. This is why it’s important to fully understanding your market position and pricing strategy.
There are several strategies for setting prices. However, a price increase based solely on rising costs or competitors’ moves rarely convinces customers.
“Customers are generally more willing to accept a price increase when they clearly understand what they’re getting in return,” explains Bernier. For example:
- a better experience
- shorter turnaround times
- greater reliability
- enhanced support
- reduced risk
Sometimes, this simply means better highlighting what sets you apart from the competition. For example, a company that owns its own fleet of vehicles could more easily get customers to accept a price increase by emphasizing its unbeatable delivery times or even listing them on its invoices.
Finally, another best practice is to segment your customer base using the Pareto analysis. This rule of thumb suggests that a small number of factors or customers—around 20%—account for a disproportionately large share of the results, often around 80%. This is especially true when it comes to revenue and complaints.
- Customer segment A: approximately 80% of revenue
- Customer segment B: 11% to 15% of revenue
- Customer segment C: a very small share of revenue
This segmentation helps you focus your efforts where they will have the greatest impact and tailor your pricing strategies to the value of each customer group.
“Pricing decisions require as much analytical rigor as they do human judgment,” concludes Bernier. “Pricing strategy remains one of the few levers that can simultaneously influence growth, profitability, operational efficiency and the customer experience.”
Next Step
Determine the most relevant financial metrics for your business by downloading BDC’s free guide for Monitoring Your Business Performance.