Why it is hard to keep pricing manageable

Computer chips, iron, oil, wood, coffee, candles and brew installations, what do they all have in common? Their prices are exploding exponentially since the Covid-19 pandemic. During the pandemic many companies didn’t focus on having a stock of products on hand because they wanted to minimize the risk of not being able to sell it. However, due to the fast economic recovery, companies are asking huge quantities of products from their suppliers. This has made the prices of a lot of products explode. For many large multinationals this isn’t a problem, but for many SMEs in the Netherlands, it could be a big issue since the increase of costs has a huge impact on profit margins.  

Supplier cost is one factor of pricing management and margin optimization. Normally, businesses think about cutting costs when their margins are in danger. However, with the increasing prices of so many products, it may be easier for businesses to look at the other factors that make up pricing. One way to do this is to keep pricing manageable. Some find this a daunting task; however, it is not if you have the right information and tools.  

In this blog you will read what internal & external factors are influencing pricing management. Internal factors are factors inside of your company that influence pricing and external factors are factors outside of your company that influence your pricing. Next to this, we also have 4 tips on how to keep pricing manageable in your company.

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Internal factors

• Company objectives – What is the target of the company? This often determines what price is asked to the customers. Companies that enter a new market maybe want to gain as much market share as possible, by having a lower price than competitors. Also known as the Market Penetration Model. Other companies may have the objective of maximizing profits or they need to accomplish other business targets. All of this has influence on pricing decisions.  

• Organisation structure – The organisational structure can also be an internal factor that influences pricing. Some companies have pricing managers that determine the price of all the products. Other companies may have sales teams or people that are able to determine their own prices to some degree. Especially companies that sell a service through salespeople may notice that the amount of money they get for the same service differs per project, salesperson or company.  

• Marketing mix – Another internal influence is that pricing should not be seen as a stand-alone feature. Pricing is most of the time interrelated to other marketing aspects of, for example, the 4P marketing mix. The pricing of a product can also be related to the promotion of that product, for example. Many times, you see that discounts in the supermarket are given to the same products at a given interval. Here the price of the product is part of the promotion strategy and this ultimately effects their margins.  

• Cost of product – The production costs of your product have to be considered. If you have to pay more for producing your product while you ask the same price to customers, then this will lead to a lower profit margin. Therefore, the costs of your product also heavily influences your pricing.  

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External factors

Next to internal factors, there are also external factors, and these are (partially) outside of your control.

• Demand – Demand for your product is one of the most important external factors. If nobody wants your product in the first place then price doesn’t even matter. Do a lot of people want your product and are you able to ask a high price? Then you easily improve your margins by increasing the price of the product. Thus, knowing the demand and price elasticity of your product is very important.  

• Competition – Competitors also influence your prices. Some companies do not have any competition in their market, but most of the businesses do have some level of competition. Their prices are also influencing your pricing because consumers and customers will often consider multiple possibilities before they buy a product. Your pricing is thus seen in relation to the competition.

• Suppliers – As said in the beginning, the cost of the products you get from your suppliers may change (rapidly). These price increases can be very sudden and decrease your margins. Therefore, you not only need to check the internal costs of production but also the costs of products you get from external partners.

• Economic conditions & government regulations – Last, economic conditions & government regulations can also influence your pricing. When the economy is booming you can charge more for your products since people have more to spend, but if the times are bad, you can ask a lot less. Next to this, government policies can also influence pricing, for example, in the tabaco industry there are regulations that influence pricing.

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Best tips for keeping pricing manageable

• Know your costs and margins – First of all, know what the costs of your products are! Costs may change over time, suppliers can change their prices, internal process may get cheaper. If you do not know what a product costs you, (or only have a rough estimate), your pricing may get messy as well because you do not know your exact margins.

• Define a clear pricing strategy for business objectives – Since business objectives are the key driver of direction in companies, you should make a clear pricing strategy that aligns with your business goals. There are many pricing strategies, and pricing strategies can also be combined to get much more complex pricing strategies. To help you with this, SYMSON has a Pricing Strategy Builder in its software to help clients pick the right strategy for their situation.

• Have pricing expertise in your team– Pricing can be a very time consuming job, especially if you have a large product portfolio. To be able to adjust pricing according to changes in internal and external factors, businesses should have someone with pricing expertise to focus on this.

• Leverage your data – Last, one should leverage data for optimal results. Nowadays, you can gather data of (almost) everything, especially online. Once you have enough data you should look into it and see where the opportunities lie. This way you can look for the optimal margin and revenue!  

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Conclusion

Pricing nowadays is very complicated, especially during times when costs of products increase a lot. SYMSON helps pricing managers and businesses with creating optimal pricing strategies with the help of AI.

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