How to Raise Base Prices in a High Inflation / Slow(ing) Growth environment
Today’s environment blends high inflation with slow to negative economic growth. This dynamic creates a difficult balancing act for many companies- how do you raise base prices to maintain/increase margins without jeopardizing win rates on new opportunities?
Five strategies below, in approximate order of effectiveness:
1. Review your total pricing structure for opportunities to offset base rate increases.
Your total price sent to the customer often involves more than just your fees and rates for core products and services. Examples include estimated reimbursable expenses and managed third party vendors, and less obvious items like services and products you add by default but are actually optional, decisions around where services are delivered from, the quantity of units that apply, among others. Review your pricing tool in its totality and look for ways to increase base pricing without increasing your net pricing.
2. Control for exogenous factors embedded in your base pricing.
Dig into your price basis and identify exogenous factors you can control for through contractual terms.
Example from the industry I come from (clinical research)- most service providers embed exchange rates and salary inflation assumptions into their base rates. A rate for “Eastern Europe” expressed in Euros could embed a dozen or more exchange rate conversions. Rates created in October may assume salary changes for next March will average out to a certain percentage, with further inflation assumptions applied for multi-year projects.
Consider controlling for these exogenous factors in the contractual terms accompanying your pricing. Employ advanced strategies for managing exchange rate fluctuation. Get creative with applying inflation to multi-year contracts, or remove inflation altogether and insert terms that a percentage factor will apply automatically to future year invoices.
Whatever you do, don’t wait until 12 months from now to review your base pricing. Exchange rates are volatile, inflation is rampant, and business conditions are difficult- be smart and stay on top of your price basis.
3. Phase in price increases over time to gain market feedback.
Most service and technology providers I interact with update their base pricing on an annual basis. In a high-inflation environment, however, cost increases steadily creep forward throughout the year, creating a catch-up mentality at year-end where the business feels compelled to push through a large increase to base pricing all at once.
This catch-up mentality can create a shock effect amongst your sales team, prospects, and customers, complicating your dealmaking efforts and adversely affecting your win rate.
If you were not disciplined enough to monitor your cost situation and gradually adjust your pricing over the past 12 months, you may need to phase in your planned price increases over the next 12 months.
Pair this phasing-in with a quarterly review of overall pricing so that over the next 12 months you will have moved past the catch-up mentality and created more disciplined pricing procedures.
4. Ask customers and outside experts what they are seeing from others.
In industries with low price transparency, elevated inflation often creates wider ranges in base pricing and cost structures across competitors. Your customers- especially the larger companies- will likely have a good grasp of these ranges and are often happy to discuss where you stand. The discussion can focus on specific pricing levels, the annual changes in prices being seen, etc. Don’t be afraid to ask.
Outside experts can also help benchmark your pricing to your competitors. The more closely connected the expert is to your industry, the better (but not 100% required). I’ll save details for a future article, but the more the benchmarking process looks beyond specific rates and into total price levels, algorithms, related contract terms, etc., the better.
(Who knows- you might just learn you’re undercharging for your value.)
5. Be prepared to discount where you must; just be smart about it.
The shock effect noted above may put you in a position where feedback from your sales team and/or prospects suggests discounting is warranted to win certain deals. These decisions must be made quickly and intelligently.
Wherever possible, keep your base pricing for those deals intact and apply the discount as a separate line item. Look for quid pro quo opportunities to improve other parts of the deal in your favor.
Don’t overreact to the initial feedback, but don’t delay in revisiting your base pricing if you consistently receive negative feedback from prospects.
I help service and technology providers with all matters discussed above. Book a meeting with me to discuss how to ensure next year’s pricing optimizes your margins and win rates so you can meet your financial objectives.