Article Updated February 2020
How do you prepare for the unpredictable?
That’s the situation millions of business owners find themselves in with Britain having left the EU on 31 January 2020.
The best preparation for Brexit, in our opinion, is to focus on the fundamentals. In this series, we explore the best ways business leaders can prepare for one of the biggest political, societal and economic shifts in decades. Our focus this time: Pricing.
One likely outcome of Brexit, according to leading economists, is that costs will rise. There could also be damaging currency fluctuations. As such, a focus on your pricing strategy is essential.
This isn’t solely Brexit advice, of course. Your company should always be pricing optimally to maximise sales and profit margins, regardless of external factors. That reflects the true value of your product and why your customers connect with your brand over your competitors.
To discuss pricing in more detail, we caught up with pricing expert and part-time Marketing Director with the The Marketing Centre and author of How to Price Your Platypus, David Abbott, who spoke to us about achieving the perfect marketing mix when it comes to pricing and gave us some of his best tips for getting your pricing right. What follows is an editorialised version of our interview.
Who is involved in the pricing decision?
It’s easy to forget that marketing plays a huge part in determining the price of a product or service: it’s not just down to the finance department. Of course, they will have an input as they are ultimately responsible for maintaining margins. Sales will also have an input as they will have insights into customer conversations, but marketing brings the crucial knowledge of the market the product is hoping to stand out in.
When making pricing decisions, the marketing team proposes the pricing strategy - that is, the price band that works best for your product and brand values. Think about the difference between prices at supermarkets Waitrose and Iceland - they will have been carefully considered as part of a pricing strategy by their marketing teams.
The marketing team will also pay close attention to the prices charged by your competitors. This market research gives an overview of the price points across your market, so you can decide where on that scale your product should sit. It’s important to know that market inside out, including how it will react to any changes in pricing, especially the price point you are proposing.
Understand the relationship between your price and your customers
When considering pricing, put yourself in your customers’ shoes for a moment. What decisions do they have to make before buying? Is this a standard purchase or a big investment for them? Understanding the external factors in your customers’ decision is vital to hitting that pricing sweet spot. Conduct thorough research about your customers, and use the market knowledge you gathered earlier to offer them something unique.
Let’s think about coffee. Before the late 1990s, a cup of joe was a simple and functional brown hot drink worth about 50p per cup. But once Starbucks opened, coffee transformed into lattes and cappuccinos, in multiple size options like grande and venti, and served by a barista. This new coffee experience made it special, and worth £2.50 per drink - a 400% price increase. While the drink itself hadn’t really changed, its new language and packaging meant customers were willing to make a much higher pricing decision.
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Of course, a consumer doesn’t go through the same purchasing decision process when buying a coffee compared to buying a car or a house, so take that into account and combine your knowledge of your product, customer and market to make the customer’s pricing decision - whatever they are buying - as easy as possible.
A useful, practical exercise is to prepare one of the charts below, tailored to your own customer’s pricing decisions. Compare the frequency of purchase against the importance of the purchase - and when we say 'importance', that isn't a measure of how much the item costs (although that plays a part), it's the pain you feel if you get the purchasing decision wrong. It's the impact on you as a consumer or on the business. For example, something like printer paper is purchased regularly, but for the majority of businesses it is not an important purchase. Hardware such as servers, however, are bought much less frequently and are very important for the storage and backing up of the businesses’ files and data.
What to do if Brexit increases your costs
Although it sounds risky, many businesses understand rising costs, and if managed well, you can raise prices and keep business. David gave us an example of a B2B client who delivers fuel for large retailers as part of their business. They were making very little margin on that part of their business. So they met their clients to explain that prices were going up, and at the same time outlined their excellent performance and KPIs. Only one client did not accept the increase, and the division is now profitable again.
The takeaway message is to not be afraid to increase prices. Your customers will understand that markets will shift due to Brexit, as long as they still feel they are getting value for their money, and that their loyalty to your brand is being rewarded. Calculate what success looks like if you put your prices up. It’s possible to balance the numbers so that you end up with more profit, even if you lose a few clients along the way.
Change the way you display your prices
Offering one set price for all of your products or services makes it easier for the customer to make a snap purchasing decision. But by displaying a range of prices and explaining what the service for each entails, you can encourage the customer to spend more and get the most out of their purchase.
David tells the story of a law firm whose solicitors were not sales people, and who needed a boost when it came to securing higher prices. He demonstrated how to present their prices in a way that optimised the higher price package. Rather than just charge a flat rate for help with a tribunal, a second option offered to review the client’s conditions of employment and contracts as well, and a third offered the tribunal support, employment contract review and training for management - at the highest price. Importantly, they offered the highest price first, so the clients anchor on that price and compare the other two options to that one. The client gets great value for their money with this package, and the firm are getting the highest price.
Another small change that can see great results is a classic: charm pricing or left digit bias. This is a simple method that involves knocking 1p off all prices, so that prices end in .99. A customer may well spend £39.99 on something they would not spend £40 on. Another of David’s clients sold handmade goods online and, after trying this, saw a sales volume increase of 36% and a margin increase of 18%.
While it’s hard to future-proof when the Brexit impact is so unknown, business leaders can’t afford to ‘see what happens’. There will be changes, there will undoubtedly be disruption and there will likely be economic challenges ahead. The businesses that will thrive will be those that are prepared for anything. A focus on pricing, and other fundamentals, is certainly a vigorous leap in the right direction.