Client Journey: Ten years without a price increase?

With inflation pushing up business costs, many businesses are finding themselves operating on prices which are too low to make a necessary profit margin. This is especially true in competitive industries like construction and transport (to learn more, read How sub-contractors can get ahead and thrive). This isn’t only a problem for those businesses. It has a flow-on effect for subcontractors and employees who may not be able to earn a sufficient rate/wage. It also weakens the industry as a whole — and the wider economy — if those businesses subsequently fail/go insolvent. 

Here we look at why some businesses struggle to raise their prices, and what they can do about it.

Why do some businesses end up with dangerously low prices?

Some of the most common causes for businesses having prices set too low include:

1. A competitive market. A business may consciously adopt low prices as otherwise they are likely to lose market share to other businesses (of fear that they will).
2. Price positioning. Related to the above, a business may consciously market itself as the lower cost alternative to other companies. If the business is known for being the ‘affordable option’ it could damage its brand by going too low with prices.
3. A lack of bargaining power. Sometimes the prices for a business are essentially out of their control. For example, in the construction industry, the price of a service is essentially set in the principal contract, meaning that a sub-contractor may have little ability to bargain.
4. A cost-based pricing strategy. If the company has generally set it’s prices based on costs, with just a modest margin, customers may get annoyed when prices increase without the business being able to specify particular cost increases.
5. Price elasticity of demand. For some products and services, customers will not accept a significant price increase, and will simply stop buying the product. For example, while news media might like to charge significantly more for online subscriptions (and use that to carry out more in-depth reporting), customers are reluctant to spend significant amounts.
6. A startup entering a new market. A startup may need to temporarily reduce its prices to get a foothold in a new market or industry.
7. Lack of a pricing strategy. Some businesses just have not thought significantly enough about their pricing strategy, and therefore end up with unsustainably low prices by default.

Why is low pricing a problem?

Raising prices, of course! Though, admittedly, this is easier said than done if the business is to avoid losing customers. Businesses need to consider the following matters:

1. Appropriate costing of products and services. A business needs to ensure that it has appropriately accounted for all of the costs of that product or service before setting a price for it. While it may be appropriate to have ‘loss leader’ products in some cases, the business still needs to know what those costs are before doing so (read more about small business accounting and budgeting here).
2. How to communicate to a price change to customers. Where there has been an easily identifiable cost increase leading to increased prices, customers may find them more acceptable.
3. A tiered pricing strategy. You may not have to raise “all” your prices. You might be able to keep a low price for minimal version of the product, but increase prices for premium versions of the product.
4. Grandfathering. You may want to consider locking in prices for existing customers, and raising the prices for new customers. This both rewards customers for their ongoing loyalty, as well as giving them the impression that they are getting a good deal relative to newer customers.
5. Value is king. Remember that people don’t pay for power drills – they pay for holes, the thing the customer ultimately wants. Similarly, you need to consider the ultimate value that your customers derive from your product when setting the price.