A recent forecast from the Institute of Directors indicates that rate of UK inflation will fall to about 5% by the end of 2023 and Rishi Sunak may well have achieved at least one of his 5 priorities.
Even better news is that their forecast shows that inflation will be back down to “normal” levels of 2% – 3% by April 2024. This is welcome news indeed for all businesses.
But how do we deal with inflation over the next 9 to 12 months?
Its still there, eating away at your profit margins by pushing up average costs by 7-8% year on year.
Many businesses will have taken remedial action to put prices up to cover inflationary increases, or to reduce expenditure. This is the right step to take in the current circumstances, but we still need to think ahead to the future.
When inflation starts to fall again next year, how will your customers judge your prices? Will they ask for a price reduction or seek to renegotiate their current deal?
Here are some thoughts I had on how you can deal with the ongoing problem of inflation.
1. Keep your “pricing radar” on high alert.
Be sensitive to the mood of the room when talking to customers. What’s going on with their business? Are they struggling or growing? What impact might that have on their perception of the prices you charge? Customers will decide to leave you long before they tell you. Try and get on the front foot and have the opportunity to influence their opinion before it’s too late.
2. Be ready for when inflation falls back to “normal”.
Don’t just expect to breathe a sigh of relief. Have a think now about what your best customers will say to you when inflation starts to fall. Don’t make the mistake of saying “we will absorb our cost increases next year because of last year’s price rises”.
Keep a firm handle on the value-to-price ratio you deliver for your customers. Plan ahead and ask yourself – “what will be our pricing plan next year if inflation is 2-3%? What will we do?”
3. Discontinue low margin / unprofitable products.
Review your product range and get rid of any low margin or unprofitable products & services. If you are tracking product profitability monthly, you will hopefully have seen the trend line already and will know what to do. If you haven’t, then take some time to do a profitability assessment of each of your core products using the most up to date unit costs to help you determine what opportunities there are for price improvement.
4. Never apply a flat “across the board” price increase.
A flat price increase of X% for all your products is a blunt tool. Far better to work through your entire product range and work out a price change for each product category, depending on:
- Sales growth
- Gross margin trends
- Product life cycle stage (e.g., new, growth or mature)
- Major / minor products in your range
- Competitive intensity
- Customer feedback.
5. Tell customers your investment story.
What are you doing to invest in your business so that you can deliver more value? E.g.,
- Recruiting more staff
- Investing in production processes & capability
- Creating a new digital platform to make online ordering easier
- Expanding your footprint to provide better service
- Developing new features, products and services.
You want to make sure your customers know what you are currently doing to improve your business offering so that they continue to see the value of working with you.
6. Future proof your pricing.
A bolder move might be to future proof your business by changing your pricing model. Rather than just doing what you’ve always done with your business, maybe there is a different approach you could take? Roll it out gradually to avoid any big shocks and slowly transition to a pricing model that keeps up with the times.
A recent B2B client has gone through this process, and we have developed a new pricing model that solves many of their issues they were previously struggling with, and has given them a new path for profitable growth in the future.
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I still worry that too many businesses treat pricing as a one-off “tactic” and fail to give it the seriousness it deserves. If you are resorting to age old habits such as “the annual price increase” or capitulating on price due to customer pressure, it’s because you haven’t put enough thought into your pricing strategy.
If you’d like some help with this, please get in touch.