How to know if there is an untapped opportunity for pricing changes in your business? There are several telling factors that call for a change in price. By the end of this section, you will be equipped to conduct a self-assessment of your current pricing approach and recognize areas for improvement.
It's highly likely that your business has room for a pricing update. Pricing is a dynamic topic that evolves in tandem with market conditions and customer preferences. Therefore, adopting a set-it-and-forget-it approach to pricing is not viable and may lead to diminished profits over time.
Regardless of how advanced your current pricing strategy might be, there's usually room for improvement that can drive business growth. The following list outlines ten indicators suggesting that your business could benefit from seizing pricing opportunities.
But first, let’s look at why you should revisit your pricing strategy in the first place.
Why do pricing changes matter?
A business that wants to remain competitive while maximizing profitability has to understand the importance of pricing changes. Adjusting the price is important for the following reasons:
Increasing revenue and profitability
A well-executed pricing update can directly boost your bottom line. Optimizing your pricing strategy can help you capture more value from your products or services. Even small increases in price can lead to substantial profit gains, especially if you can maintain your sales volume. A 1% improvement in pricing can potentially lead to up to a 12.3% increase in revenue, according to experts!
Better alignment with market demand
Markets are dynamic, and customer preferences evolve over time. Regular pricing changes allow you to stay in sync with these shifts. You can adjust prices upward for products or services in high demand, or lower prices for those with waning interest. This alignment helps you maximize revenue across your entire product portfolio.
Reflecting changes in cost and market conditions
In today's volatile economic environment, the costs of raw materials, labor, and other inputs can fluctuate rapidly. Implementing timely pricing changes ensures that your prices reflect your current costs, helping you maintain healthy profit margins. Additionally, it allows you to respond to broader market conditions such as inflation, exchange rate fluctuations, or industry-wide trends.
Reflecting brand value and perception
As your brand grows and establishes itself, pricing changes can reflect its evolving value in the market. Gradual price increases can be a signal of your brand's growing prestige and quality, reinforcing its position in the market. Conversely, if your product is priced too low, it may be perceived as a low quality offering.
Improving competitive positioning
Pricing is a key component of your market positioning. Strategic price changes can help you differentiate your offerings from competitors. For example, a price increase coupled with enhanced features can position your product as a premium offering, while a price decrease might help you capture more price-sensitive market segments.
Optimizing your offering for customer segments
Pricing changes can be used to influence customer behavior and optimize your product mix. A pricing update allows you to tailor your pricing to different customer segments, maximizing value extraction from each group based on their willingness to pay. Am I saying that adjusting prices can be used to encourage customers to choose higher-margin products or services? Totally.
A price change is not just about adjusting numbers – they're about strategically positioning your business for success. If you've previously underpriced your products or services, pricing changes offer an opportunity to correct these mistakes and capture the full value of your offerings.
Regular, data-driven pricing updates allow you to respond to market dynamics, optimize your operations, and drive sustainable growth. Recognize these facts and act on them accordingly and you set yourself on the way to unlocking a significant untapped potential in your business.
But how to know whether your business has pricing opportunities waiting to be grabbed? There are 10 telling signs - let’s look at them in detail now.
Sign #1: High complexity in the business
Businesses with numerous customers, products, transactions, or channels may have untapped pricing change opportunities due to the difficulty of managing such complexity effectively.
Consider a global manufacturing company with thousands of products, serving diverse customer segments across multiple countries. Each product might have different costs, competitors, and market dynamics in each region.
This complexity makes it challenging to set optimal prices for every product in every market. The sheer intricacy of the business suggests there are likely pricing inefficiencies that could be addressed for improved profitability.
This issue can be addressed by implementing a pricing analytics system that can handle the complexity and provide data-driven insights for price changing. A modern data platform, equipped with relevant data integration mechanisms, is indispensable for automating these processes.
Sign #2: Margin erosion due to rising costs
This is a clear indicator that there is room for a pricing change. Margin occurs when increases in costs (e.g., raw materials, labor) are not matched by corresponding price increases, leading to shrinking profit margins over time.
Imagine a bakery that's been using the same pricing for its artisanal bread for years. Meanwhile, the cost of flour, yeast, and labor has steadily increased. The owner notices that despite consistent sales, profits are shrinking.
This gap between rising costs and stagnant prices is slowly eating away at the bakery's profitability, clearly signaling the business needs to adjust the price to maintain healthy margins.
This issue can be addressed by regularly reviewing your costs and implementing a pricing increase strategy that aligns with cost changes while considering market conditions.
Sign #3: Not meeting price realization goals
When updated pricing doesn't result in the expected revenue gains, it’s often due to poor execution or a lack of differentiated pricing strategies.
A software company implements a 10% price increase across its product suite, expecting a corresponding boost in revenue. However, three months later, they find that actual revenue has only increased by 5%.
This shortfall indicates that the price increase isn't being fully realized, perhaps due to excessive discounting or poor communication of value to customers. It's a sign that the company needs to revisit its pricing execution strategy.
This issue can be addressed by analyzing the factors affecting price realization and adjusting your pricing strategy accordingly. This may involve improving value communication, tightening discount policies, or implementing more sophisticated pricing tools.
Sign #4: Significant cost to serve elements
Various additional costs like freight, discounts, and promotional prices can eat into profits if not properly managed and accounted for in pricing strategies.
A logistics company charges a flat rate for deliveries but finds that profitability varies widely between customers. Upon investigation, they realize that factors like distance, package handling requirements, and frequency of deliveries significantly impact the cost of serving each client.
This variation in cost-to-serve elements, if not accounted for in pricing, represents a clear opportunity for improving overall profitability through pricing changes.
How to address this issue? Ensure a thorough analysis of your cost-to-serve elements and incorporate them into your pricing mix. Consider implementing a more granular pricing structure that reflects these variations.
Sign #5: Margin variation caused by product positioning strategy
Inconsistencies in pricing across product lines or tiers, such as premium products priced similarly to lower-tier ones also clearly indicate opportunities for pricing changes (most likely for price increase for better market positioning).
An electronics retailer notices that their high-end laptops are only marginally more profitable than their mid-range models, despite a significant price difference.
This inconsistency in pricing relative to product positioning suggests an opportunity to realign prices to better reflect the value proposition of each product tier, potentially increasing overall profitability.
This issue can be rectified with a thorough review of your product portfolio and pricing update that ensure alignment with your product positioning strategy. Consider implementing a value-based pricing model (see our earlier text on this and other most effective pricing models) to better reflect the perceived value of each product tier.
Sign #6: Value or price elasticity not understood or leveraged
Lack of insight into how customers value products or how price changes affect demand can lead to suboptimal pricing decisions.
A streaming service raises its subscription price by 20% and is surprised to see a 15% drop in subscribers. This unexpected response indicates that the company didn't fully understand its customers' price sensitivity.
A better understanding of price elasticity could have led to a more optimal price increase, maximizing revenue without significant customer loss.
To address this issue, conduct market research and analyze historical data to understand your customers' price sensitivity - this is something that can be easily achieved with the business intelligence tools available on the market. These are designed to use the information to help you make more informed pricing decisions and to adjust the price more effectively.
Sign #7: Costs tied to market indices
For businesses dealing with commodities, failing to adjust prices in line with market index changes can lead to margin erosion or lost opportunities.
A fuel distributor sets prices at the beginning of each month based on last month's average oil prices. However, oil prices are volatile, often changing significantly within a month.
This lag in pricing change relative to market changes can lead to periods of unexpected profit or loss, indicating an opportunity for more dynamic, index-linked pricing.
One way to rectify this issue is to implement a dynamic pricing model that automatically adjusts prices based on real-time market indices. This approach allows you to maintain your desired margins and capitalize on market fluctuations.
Sign #8: Many people having authority to change or manage price
Decentralized pricing authority can lead to inconsistent pricing decisions that may not align with the overall business strategy.
In a large sales organization, individual salespeople have wide latitude to offer discounts. This leads to inconsistent pricing across similar customers and products.
The lack of centralized control over pricing decisions suggests an opportunity to implement more standardized pricing policies to ensure consistency and strategic alignment.
Address this issue by centralizing pricing authority and implementing clear guidelines for pricing decisions. Use pricing software to enforce these policies while still allowing for some flexibility where needed.
Sign #9: Unclear if and when sales uses recommended prices, and why
Lack of visibility into the sales team's pricing practices can lead to unwarranted discounts and price variations.
A B2B company provides its sales team with recommended prices for each product, but has no way of tracking whether these recommendations are followed. They notice wide variations in realized prices for similar deals.
This lack of visibility into sales practices suggests an opportunity to implement better tracking and understand the reasons behind price variations.
How to best address this issue? You can implement a system to track adherence to pricing recommendations and analyze deviations. Provide training to the sales team on the importance of pricing strategy and when exceptions may be warranted.
Sign #10: Reporting & analytics not providing enough granularity and clarity
Insufficient or unclear data analysis can lead to misunderstandings about the true drivers of revenue and profit, hindering effective pricing decisions.
A retail chain sees that overall revenue is up, but profitability is down. Their current reporting doesn't allow them to easily identify which products, stores, or customer segments are driving this trend.
This lack of granular insight suggests an opportunity to improve data analytics capabilities to make more informed pricing changes.
Investing in business intelligence or business analytics solutions that provide detailed insights into pricing performance across various dimensions (products, customers, regions, etc.) is the best way of addressing this issue. Use these insights to implement more targeted pricing models.
Unlock additional revenue through the right pricing update
One mistake we often see with businesses who devote their time and energy to process improvements in hope for better results is that they tend to think that pricing is set in stone - they rarely reconsider that aspect of their business. Meanwhile, pricing is not a one-time event but an ongoing process. Regularly reviewing and updating your pricing strategy is essential to stay ahead in today's dynamic business environment.
Recognizing the signs that your business could benefit from a pricing change is crucial for maintaining profitability and competitiveness. If you've identified one or more of these signs in your business, it may be time to consider a comprehensive pricing update. However, implementing pricing changes can be complex and requires careful planning and execution. That's where expert guidance can make a significant difference.
At RST Data Cloud, we specialize in building the data environments necessary for advanced pricing analytics and offer expert pricing consulting services. Our team of experienced professionals can help you:
- Conduct a thorough pricing assessment, during which we'll analyze your current pricing strategy, identify areas for improvement, and quantify potential gains from pricing changes.
- Develop a customized pricing strategy based on your unique business needs and market conditions, we'll create a tailored pricing strategy designed to maximize your profitability.
- Implement advanced pricing analytics to provide the granular insights you need to make data-driven pricing decisions.
- Train your team to ensure your team understands and can effectively implement new pricing strategies.
- Provide ongoing support and optimization to help you monitor the impact of pricing changes and make necessary adjustments.
If you're ready to unlock the hidden profit potential in your business through strategic pricing changes, we're here to help. Just drop us a line via this contact form for a free data and pricing analytics consultation. Our experts will review your current pricing approach and discuss how we can help you implement effective pricing changes to drive your business forward.
