Whenever there is a jump in inflation, or even the possibility of a jump, there are always some marketers who think, “Aha! raise our prices and blame it on the economy!” This is the wrong move and here’s why.
If you the . tied up price of your products and services at the expense of their cost, you have turned yourself into the supplier of a product and goods always have paper thin margins.
If your price is such that you can’t accommodate any inflation in your supply chain or cost structure, you’ve already screwed up. If so, I have some advice at the end of the post, so hang in there.
Pricing should always be based on the value of the product to the customer and not on the cost you incur to deliver that product. Therefore, your price should only respond to the economy to the extent that the economy changes the value of your product to your customer.
To be clear, I am using the term ‘value’ to mean the positive financial impact of the product there to increase revenues or reduce costs (i.e. make a profit) rather than the seller’s definition of ‘value’ as ‘the lowest price’. priced product.”
Here’s an example from my own consulting experience. When I started out, I had a certain dollar amount in mind that I needed to earn per hour to make my consulting practice profitable. Like a lawyer, I charged an hourly rate based on what I thought my time was worth.
However, I soon learned that the value of my experience and perceptions could have an inordinately positive impact on the bottom line of my client business. For example, it would take me five minutes to write a cold email that doubled the number of qualified prospects entering the sales pipeline.
Depending on the customer, that email could bring in $1 million in additional profit. Even if my hourly rate were $600, I would only charge $50 for that email. That’s a good deal for the customer, as it equates to an annualized ROI of 1,999,900 percent.
Once I realized the value of my particular brand of expertise, I always started my discussions with calculating the value before even talking about the price. I then based my award on the financial impact and often got $10,000 to write a single email.
I am not telling you this story to impress you, but to impress upon you that the price should always, as far as possible, be based on the financial value of the product and not on your cost to deliver it.
If you use inflation as an excuse to raise your prices, you are simply encouraging the customer to think about your costs rather than the value you are offering them. And that’s the mindset you should discourage!
There is only one exception. If the economy starts to change, damage or destroy your customers’ business model, it affects the value of your product in terms of its ability to make your customer more profitable.
But then you adjust your price because the value decreased, not because your costs increased.
So, what if your costs rise? Under those circumstances, isn’t it a good idea to raise your prices? Answer: Only if you’ve already screwed up. If you’ve set the right price, there should be more than enough margin to accommodate anything but hyperinflation.
So what do you do when you messed up and don’t have enough margin to absorb inflation?
Your first step should be to review your pricing strategy and figure out why it was so vulnerable in the first place. If you do indeed need to increase your price to remain profitable, do so in such a way that you do not get involved in a counterproductive discussion about your costs. There are five ways to do this:
- Replace direct purchase with a subscription.
- Lower your base price, but increase the price of a common option.
- Bundle multiple options into one price.
- Offer to finance the purchase.
- Reframe smaller packages as greater value.
I describe these methods in detail in the post “How Microsoft, Nabisco and GM Make Customers Happier by Raising Prices.“