Rising inflation is a challenge that every business owner faces at some point. For any business, it can be particularly difficult to navigate the delicate balance between maintaining profitability and keeping customers satisfied. In these times, conducting a pricing review is essential to ensuring that your business remains competitive and sustainable. This article will explore strategies for effectively tackling a pricing review during periods of high inflation.
Australian Inflationary Outlook
The good news is that in Australia, CPI inflation slowed in the March quarter with the quarterly rise being the lowest since December 2021 ( Source: ABS Head of Statistics ). Currently Australia’s inflation rate is sitting at 7% (CPI March Quarter 2023), and this recent drop is not necessarily a sign of a trend. Inflation is expected to remain at high levels for some time to come. Price rises are different across sectors, so depending on where your business might sit, or who your customers are, your business is likely to be feeling differing impacts from these increases.
>According to the ABS, the most significant price rises were medical and hospital services (up 4.2 per cent), domestic travel and accommodation (up 4.7 per cent), tertiary education (up 9.7 per cent) and gas and other household fuels (up 14.3 per cent).
Discounts in some areas (furniture, appliances and clothes) resulted in a decrease in goods annual inflation, from 9.5 per cent to 7.6 per cent, after two years of steady increases. Automotive fuel prices had also gone down by 0.8 per cent for the quarter.
However, the annual price of services rose by 6.1 per cent – the largest increase since 2001 – driven by higher prices for holiday travel, medical services, rents and restaurant meals.
Power prices continue to rise (especially for households), with the annual rise in gas prices of 26.2 per cent the largest on record, reflecting the quarter’s rise as well as price reviews in the September quarter 2022.
So given the current environment, when was the last time that you reviewed your prices? Businesses have been operating in a period of low inflation for a very long time, with some industries even seeing prices go backwards, so potentially your business is overdue for a price review. Let’s look at factors you need to consider as part of that review.
Understand the Impact of Inflation on Your Business
The first step in addressing inflation is to understand how it affects your business. Inflation can impact various aspects, such as the cost of goods and services, labour, and rent. Analyse your business’s financial statements to identify areas where rising costs are affecting your profitability. This will help you determine which products or services are most vulnerable to price changes and require immediate attention.
Get clear on what your customers really want
When we are clear on what our customers are really looking for and provide exactly that, they are less likely to be sensitive to price movements. When was the last time that you surveyed your customers? What about paying attention to your reviews? What are they saying about your products and services? We need to ensure that we are meeting the needs of our customers where they are right now – this goes beyond ensuring that we have the varieties that they are looking for, but are we offering our services in a way that is convenient for them. Are we easy to buy from? The phrase – ‘ a pleasure to do business with’ is something that comes to mind here, but focussing on the practical aspects of our offer to ensure it actually meets the needs of our customers.
Monitor Competitor Pricing
During a period of rising inflation, it’s crucial to stay updated on your competitors’ pricing strategies. Monitor their pricing changes and evaluate how they’re coping with the increasing costs. This information will help you gauge the market’s reaction to price adjustments and provide insights into how your customers might react to your own pricing changes.
Evaluate Your Pricing Strategy
Analyse your current pricing strategy to determine if it’s still effective in the face of inflation. Consider factors such as your costs, target margins, and the value you provide to customers. If you find that your pricing strategy is no longer sustainable, consider alternative approaches, such as value-based pricing or tiered pricing, which can offer more flexibility during periods of economic uncertainty.
Communicate Changes Clearly
Transparent communication is essential when implementing price changes. Inform your customers about the reasons for the adjustments and emphasise the value your business provides. By being upfront about the changes, you can help mitigate potential backlash and maintain customer trust.
Consider Implementing Gradual Price Increases
In order to minimize the impact of rising inflation on your customers, consider implementing gradual price increases over time. This approach can help your customers adjust to the new prices and maintain their loyalty to your business. Additionally, regular, smaller price adjustments can be easier to manage and communicate than larger, infrequent changes.
Focus on Providing Value
During periods of high inflation, customers are more likely to be price-sensitive. By focusing on providing exceptional value through quality products, excellent customer service, and unique offerings, you can maintain customer satisfaction even as prices increase. This approach will help you differentiate your business from competitors and retain customer loyalty.
Optimise Operational Efficiency
Reducing costs and increasing efficiency can help offset the impact of rising inflation on your business. Review your processes, supply chain, and overhead costs to identify areas where you can cut expenses or improve productivity. This can help you maintain profitability without relying solely on price increases.
Whilst inflation may have reached its peak in Australia ( fingers crossed) we are in an extended period of higher inflation than we have seen in the last 5 years and this presents unique challenges for business. With careful planning and a strategic approach to pricing, it’s possible to navigate these complex times. At DFK Everalls, our team can help you walk through this process. We have a comprehensive Profit Improvement Plan program that specifically walks you through a pricing strategy as part of your overarching business plan.
You don’t need to feel trapped by rising prices everywhere in the economy except in your business. If you need help tackling a pricing review during this inflationary period, talk to our business advisors about how we can help your business continue to achieve its profit targets in a high inflation environment.