Jonathan van Spijker Baan

How Inflation Killed Three Common Pricing Practices For 2023

How Inflation Killed Three Common Pricing Practices For 2023
Jonathan van Spijker Baan

Jonathan van Spijker Baan

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2022 will go down as the year in which pricing got on virtually every CEOs agenda. Extraordinary inflation rates forced all companies to be proactive – even those that had been reactive about their pricing thus far.

Not that pricing is a completely new topic. Over the past decades, we have seen an enormous increase in companies embracing the importance of pricing and enhancing their pricing capability in one form or another. However, 2022 was a game changer.

Companies realized they quickly had to increase their prices to stay alive, but many didn’t have the capabilities to do so. They were not confident enough in (or knowledgeable enough about) the value their products and services brought to their customers, were inexperienced in setting price change strategies or had a salesforce unable to negotiate price increases.

Effects of bad pricing practices stay under the radar during normal circumstances. Yet in 2022, it showed how much harm they can do. As inflation is still on the rise, it’s time to say goodbye to three common bad pricing practices in 2023.

1 Not taking ownership

Many companies believe prices are dictated by the market and there is nothing they can do about it. 

This is not only false, but also extremely damaging to the bottom line of the company. No matter how competitive, commoditised and/or challenging their market is, there is always something that can be done about pricing. A solid pricing strategy exercise should be a board level priority, and consists of three parts:

  • First, start by sketching the full price waterfall of your company: from gross revenues to bottom line, through international/regional list prices, on-invoice discounts, off-invoice rebates, surcharges, costs, etc. 
  • Then, determine improvement drivers on each level of the waterfall. For example: define a structured approach to determine list prices or introduce a discount approval matrix.
  • Finally, assign clear roles and responsibilities to execute on each driver. 

The person in charge should not necessarily be a dedicated pricing manager. For example, marketing could be responsible for the list prices, while sales is responsible for discounts.  

2 Not knowing customer value

Cost-plus pricing, a pricing method based on the costs of production plus a profit markup, is easy to do but brings some major drawbacks. 

For example: cost increases need to be passed on quickly to customers, to ensure that predefined margin goals are met. However, cost-plus prices do not take into account customers’ willingness to pay. When increasing prices, you’ll never know beforehand whether customers will accept the price increase or find it unacceptable and fight back. As a result, companies with cost-plus pricing were often not successful in realizing price increases because of their one dimensional argumentation. Some even alienated their customers, who sought for alternative suppliers.

Instead of cost-plus pricing, companies should adopt value-based pricing. This means you research how much value your product or services brings to your customers - compared to alternatives. Then, you define prices based on that value. What helps a lot too here, is to consider price elasticities: you simulate the market (including competition, cost prices) to estimate what your ‘price-response curve’ looks like. A price-response curve gives great insights into how customer demand reacts when prices change. Finally, you optimize prices based on your goals, e.g. maximizing revenue and/or profits.

3 Being guided by gut feel

In the past, many companies have relied on gut feel when it comes to pricing and discounting decisions. This approach is often based on subjective opinions of a relatively small number of people – and can lead to missed opportunities or overpricing. 

For many companies, this approach backfired in discussions with customers on price increases. Representatives of these companies often came unprepared, with little understanding of the customer relationship and situation (e.g. product mix, volume developments, past price increases, share of wallet). The disability to counter customer objections in a fact-based way led to disappointing negotiation results.

Instead, companies should use data and insights about customer needs and preferences to inform their one-off and long-term pricing decisions. Useful data and insights can range from highly quantitative transaction data to more qualitative data like sales feedback and customer surveys. Applying these insights will lead to better pricing decisions, supporting initial price setting as well as required evolutions in the future.

Final thoughts

In conclusion, companies that want to succeed in the future will need to embrace pricing as a value-creating capability. How? By getting in the driver seat and adopting value-based pricing approaches supported by data and insights. By doing so, they can set prices that are both competitive and profitable – with great contributions to the bottom line and valuation. 

What are you going to do differently in 2023? I invite you to think about it – and feel free to reach out in case you would like us to help you untap your pricing potential!

About the author

Jonathan is a strategy consultant specializing in top-line growth. He has a background at Simon-Kucher and Radisson Hotels.

Jonathan van Spijker Baan

Jonathan van Spijker Baan

Expert Partner Pricing @ Sweav

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