Your pricing strategy can make or break your business success. So, why do we often view our pricing as ‘set and forget’ until business is tight or we’re losing money?
With budgets decreasing and the cost of business going up, reviewing your pricing strategy is more important than ever before. However, if it’s been a while since you last reviewed your pricing – or you never have – you may not know where to start.
To help you step through the details, our business advisers share pricing strategy tips, benefits and how a pricing strategy can drive profitability, mitigate risk and decrease costs.
What is a pricing strategy?
A pricing strategy is more than setting prices or defining margins. It’s the method to how you price your product or service to maximise profits, create value, drive demand, and outperform your competitors.
While there’s a lot that goes into a pricing strategy, it needs to be specific to your business and be directly linked to your business and revenue goals. This ensures your pricing is supporting your business strategy and driving growth in the areas you need.
What benefits are gained by regularly reviewing your pricing strategy?
Just as costs change over time, so too should your pricing strategy. By regularly reviewing your pricing strategy, you can:
- Understand your true profit per sale
- Identify growth and revenue opportunities
- Discovery margin leaks and decreases
- Uncover cash flow impacts and roadblocks
- Better position your product / service in the market
By identifying your projected profit for each sale, you can also better plan and manage external impacts such as supply shortages, labour increases and other unknown setbacks. Quite often businesses are unknowingly undercharging products and services, directly impacting cash flow and creating trading losses.
What should trigger a pricing strategy review?
While pricing strategy should be monitored and reviewed regularly, there are some clear signs to watch for you, such as:
- Large fluctuations (up or down) in sales
- Not being able to keep up with demand
- Cash flow decreases, short or tightness
- An increase in businesses loss or costs
- Changes in competitor pricing, the market or industry
- No price changes for a long period of time
- Discounts heavily driving business
Supply and labour costs may also be eating into your profits. This is especially important in industries that have seen cost hikes in recent years, such as residential construction. Construction costs have increased more than 25% over the last five years, pushing Australia to the fourth most costly region for construction labour. With fluctuating material costs and supply chain impacts, construction companies should not only be reviewing their strategies more regularly but also with each and every project quote to avoid large margin losses.
If you haven’t reviewed your pricing in a while, the revenue losses could be substantial. For example, we recently had a client who had kept their pricing the same for 15 years. By conducting a review we were able to uncover the opportunity for a 29% pricing increase – greatly increasing their profit margin while still making them cheaper than their competitors.
Winning every deal or proposal? You could be undercharging for your services or experiencing margin leakage due to heavy discounts.
How to review your pricing strategy
To maximise growth, you should (at a minimum) review your pricing strategy annually alongside your business strategy and goals. This ensures your pricing strategy is supporting your overall business objectives and needs.
Not sure how to start? With hundreds of pricing reviews under their belt, we asked our business advisers for tips to get the best results.
Gather business insights
When developing your pricing strategy it’s important to use real business insights. This is where your business adviser or accountant is key, diving into the numbers to uncover business risks, growth opportunities and profitability impacts.
By reviewing your financial and operational data, you can undercover key insights to drive the direction of your strategy, including:
- What products and services are costing you money
- Where there’s opportunity for growth or margin increase
- How to improve cash flow and increase profitability
- What is causing margin leakage or profit loss
Consider external factors and impacts
Applying these internal insights alongside key market and competitor analysis, you can determine your pricing objectives and in turn define which strategy is right for your business.
External factors to review include:
- Increases or projected increases in third-party pricing or subscriptions
- Changes to competitor pricing or pricing approaches
- Changes and fluctuations to market supply and demand
You also need to consider what legislation and regulations relate to your industry to ensure your pricing is compliant.
Taxes are also a crucial part of your pricing strategy and should be considered to ensure come tax-time you don’t experience a major business loss. If you’re unsure what taxes apply, our business advisers can talk through the details and advise on what you need to consider.
Pick the right pricing strategy for your objectives
There are four main types of pricing strategies:
- Cost-based pricing strategies: Based on either adding a margin onto your costs or cost defined by an hourly rate.
- Competition-based pricing strategies: Defined by the going rate in the market and competitor pricing or approaches.
- Value-based pricing strategies: Defined by perceived customer value, the exclusiveness or quality of your product or service.
- Product-based pricing strategies: Based on setting lower or higher initial price points or at cost to attract customers.
Regardless of the pricing strategy you choose, the key is ensuring you have enough profit margin to manage the unknown. This is sadly where a lot of business can go wrong. For example, if supplies are delayed, is a 10% profit enough to pay your contractors? If not enough of a margin, this could quickly become a loss.
It’s also important that your terms and conditions include clauses around pricing changes, allowing you to increase or decrease pricing at your discretion. This could ensure pricing is increased to cover for third-party price increases or unseen market impacts, or allow you to take on a new job at cost during a quieter period to ensure ongoing work.
Monitor and review on an on-going basis
By regularly monitoring your pricing, you can identify further trends or insights that could impact your profitability and financial performance. This could be uncovering heavy discounts being applied too often and removing margin benefits, costs slowly eroding your profits or cash flow.
This is why our business advisers sit down with clients each and every quarter and analyse business performance, providing insight into their business financials and operational costs. This business insight puts you back in the driver’s seat, providing the ability to make strategic changes to your pricing before it impacts your bottom line.
We also recommend a full pricing strategy review is conducted alongside your annual business strategy, ensuring your pricing continuously supports your business goals and growth.