POST-COVID Pricing Revisited
About the Author:
Simon Manawaiti
Principal at Accountech Chartered Accountants
Simon is Principal of Accountech spent the best part of 10 years working as an Accountant in some of the world’s largest companies, and is focussed on help people succeed and move their business into the future.
If your business in struggling to make ends meet, one serious option to consider is increasing your prices.
Let's take a look at a simple financial scenario:
SALES $100
COSTS $90
PROFIT: $10
Say we increase prices by 5%:
SALES $105
COSTS (SAME) $90
PROFIT $15
In this scenario, profit has increased by 50% following on from a 5% increase in prices.
How do businesses increase prices without alienating current customers?
Below are three ways that can help:
Break down the services you offer
Breaking down what you provide to customers can highlight services you aren’t charging for. These services provide value for your customers which gives you an opportunity to link increased pricing to value. This exercise also allows you to offer different service levels to customers depending on their needs.
Only change for new customers
This method of segmentation means that your pricing changes will take longer to come into full effect. However, because you’ll be testing prices on a small sample size, this can be helpful to determine whether new pricing will be successful for current customers too.
Grandfather Prices
This is very popular with Software as a Service (SaaS) businesses and can work elsewhere. The approach is to give a long period of notice before increasing prices for existing customers. An extended period of say three to six months, gives clients enough time to assess the market before having to fork out higher prices. An example would be to say:
Due to Covid-19 shipping challenges and a lower NZ dollar, we have been experiencing some stock shortages and import costs have been going up. Please bear with us at this challenging time.
We will be keeping prices at current levels for as long as we can, but this is to let you know that prices are likely to increase in the near future.
As long as your prices remain fair and your service is good, your customers are likely to stay loyal to you. Existing customers may also take advantage of the news to increase their orders before prices go up.
Accept Churn
You may well lose some customers when prices go up. In the simple financial scenario above, you could lose up to a third of your customers before breaking even. Such an impact is unlikely to happen, unless there is strong competition at your existing price point, in which case you would need to be focusing on your cost structure to remain competitive.
Once you accept that not all customers will be impressed by changing prices, it makes it much easier to change them. In an unprofitable business the alternative is usually far worse.
Principal
Accountech, Chartered Accountants
(027) 527 2653
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