So how can companies set the right prices, balancing rising costs with increasingly price-sensitive customers? Here are three strategies to help with that high-stakes decision.
1. Set a clear, data-based pricing strategy.
Pricing is not just an isolated action. It’s an enabler to where you want to go. To align pricing with your strategic goals, divide customers and products based on their importance to your brand. It also helps to understand how prices can resonate differently in different markets. Too much discounting can erode a brand, so while companies are trying to appeal to customers in an uncertain economy, they need to be careful that those customers don’t become addicted to the discounts. At the same time, companies need to be able to quickly adjust their pricing in response to customer reactions to price increases.
2. Understand how much of your price increases actually stick.
Price realization, or how much of a planned price increase sticks after discounts or rebates, is a common challenge for many companies. Local teams may decide not to implement increases. Discounting and coupons could roll back the increases. It is essential to understand why pricing may be leaking, and then take corrective steps. “If you can’t identify the ‘where’ it’s happening, then it is going to be very difficult to fix the ‘what,’” says Brittany Easley, Senior Vice President, Strategic Pricing and Growth, Advance Auto Parts.
3. Improve governance and align incentives for your pricing strategy.
Set specific guidance for allowable discounting at the local level. Incentivize both employees and customers based on the desired outcomes, such as pricing for margin or for hitting certain sales commitments. Coach salespeople to be able to explain the price increase to customers and, when possible, bundle a price increase with a product improvement to shift the focus of the conversation. Most importantly, follow through, as pricing is no longer a set-it-and-forget-it exercise. It’s important to revisit your prices to see how they performed and what adjustments you may need to make going forward.