BrazilThree key steps for setting and implementing price increases
The current combination of supply chain disruption, soaring oil & gas prices and raw material / commodity prices is causing an inflationary shock. The result? Significant price increases.
For companies of all sizes, coping with today’s large price increases (inflation in most markets is at its highest point in decades) is a major challenge. As with any case of price setting, the key to success is to balance the positives (protecting margins by passing on price increases) with the negatives (taking a margin hit to protect market share by absorbing price increases).
In order to be effective in price increases, companies need to take a structured and fact-based approach, according to experts from Simon-Kucher & Partners. Just as important: give attention to communication and ‘change management’.
Three key considerations for price increases
Simon-Kucher & Partners is one of the world’s leading pricing consultants, and based on its experience advising clients, the consulting firm has developed a ‘best practice’ framework for pricing. When it comes to analysing and implementing price increases, the consultancy advises to explore three key questions.
1. What is the strategic rationale behind the price increase?
Analysing and defining the goal of your price increasing measure is paramount to its success. Some of the steps that should be considered include:
- Align prices to willingness-to-pay: Implement a pure price increase across the portfolio (with no incremental value) to correct for systematic undercharging.
- React to competition: Create an appropriate competitive gap that aligns to relative price positioning in the market. This may include following competition or maintaining a favourable competitive position.
- Charge for added consumer value: Ensure that innovations in the product or service roadmap are properly captured in the portfolio and any new value provided is properly monetised.
- Pass costs through: Determine whether it’s necessary to pass through some or all of the costs to the consumer.
- Differentiate product roles: Ensure companies are taking a segmented approach to price increases and maintaining core strategy (e.g. land and expand or traffic-driving versus margin-building) for their entire portfolio of products and services.
2. How much should I increase prices?
Another important decision to consider for a strategic price increase approach is the height of increase. It is often most effective to keep your prices just below consumers’ psychological thresholds.
There tends to be minimal elasticity when price increases do not cross these key thresholds, which enables many companies to maximize revenue and profit with minimal impact to volume. The strength of these key price points are company and strategy related.
The magnitude of the price increase is best determined in one of two ways:
- Less frequent but larger price increases: This scenario works best for companies that do not make revolutionary changes but collect a lot of small improvements to their offering over time. This is also a good option if the operational complexity of implementing a price increase is prohibitive. In this situation, it is best to shift prices to the next level.
- Frequent but smaller price increases: This scenario is effective for companies that are continuously rolling out new features, benefits, products, and services that provide value to consumers. In this situation, smaller price increases work best. A good rule of thumb is to raise prices by roughly 10 percent.
In both cases, it’s important to estimate the potential churn or backlash to the desired price increases. At Simon-Kucher & Partners, we recommend conducting a market survey to understand the acceptability of price increases across consumers and to quantify the net impact to their business.
3. How should I communicate the price increase to my existing consumers?
Defining a strategic price increase approach can be challenging and requires significant preparation. In communicating price increases, consider the following components:
- Determine the optimal communication channels whether it is push (e-mail or app notification etc.) or pull (via website, blog posts etc.)
- Highlight the rationale and context for your price increase by linking it clearly to the benefits consumers will receive from the incremental value added to products and services or investments in innovation.
- Be transparent but minimize the magnitude by choosing to communicate either the total price increase or the percentage, whichever creates less friction.
- Give advance notice and grant a grace period if relevant (typically applies to subscriptions / recurring purchases)
In certain situations, price increases may not need to be communicated to existing customers.
Conclusion: A strategic approach and clear communications
In summary, many factors should be considered to implement a successful price increase strategy. Considering three core questions will help you to define a suitable strategic approach. Keeping in mind how much you charge – and how you communicate it – are both equally important for successful price increases.
And once the process has been determined, optimised pricing will enable companies to cushion the inflationary shock most effectively.
