Pricing Isn’t A Noun; It’s A Verb! Leveraging Pricing For Sustainable Growth

As we pull away from extreme volatility caused by inflation and other macroeconomic headwinds, leadership teams across industries have found themselves with a new standing item on their agendas, navigating the complex dynamics of pricing strategies. The recent period has underscored the critical role of pricing, not just as a reactionary measure but also as a fundamental element of strategic decision-making within organizations. As inflation cools, it presents an opportune moment for leaders to reflect on the lessons learned and fortify their positions to be best prepared for the inevitable future fluctuations.

The Strategic Imperative of Pricing Adaptability

The resurgence of inflation served as a stark reminder of the vulnerabilities inherent in static pricing models. Companies that had previously allocated minimal attention to pricing found themselves exposed to rapid margin erosion, as inflationary pressure set in. This situation necessitated a strategic pivot, compelling leaders to reconsider their approach to pricing as an essential component of their organizational strategy.

A key takeaway of this period is the importance of agility and adaptability in pricing, acknowledging that the value proposition of goods and services is a dynamic variable influenced by many compounding factors.

Leadership Decision-Making in Pricing Strategy

Leaders in 2024 face a strategic decision: whether to lower, maintain or increase prices. Executives appear to favor increases, while frontline sellers and media lobby for decreases. Each option comes with its own set of implications for the organization’s financial health, market positioning and customer relationships—our position is, increases are often required and more accessible than many might think.

Consideration Against Lowering Prices

Demands to lower prices due to downward trends in market indices misses the mark, failing to recognize the importance of value. It neglects to account for the business imperative of increasing nominal revenues to sustain operations in response to inflation. Moreover, the assumption that decreasing prices will automatically lead to a surge in demand is flawed, especially in a market characterized by financial prudence.

Decision-makers should consider the impact of price adjustments, taking into account not just the cost dynamics but also the intrinsic value their products or services command.

Rationale for Maintaining Prices

Holding prices steady should be the default position for most firms rather than returning hard-earned gains. We are often asked where price wars begin; this is that place. In a market that’s steady and with players in proper relative position, a market leader who drops price will initiate a price war. Market participants who cannot quickly add value, required to maintain their position, will respond by decreasing prices.

Leadership should also realize that this is likely not a long-term position, and price increases will need to return. Inflation has cooled and some cost indices decreased, but not all. Expectations suggest that the combined effects of rising costs and inflation will surpass those experienced in the 2010s. Therefore, if your firm cannot find annual efficiencies exceeding a five percent rate to maintain and/or grow margins, you will need to look to the top line.

Case for Increasing Prices

Raising prices is much more viable than people think. Inflation is ubiquitous, meaning when the value of the dollar decreases (inflation), more are needed in exchange for the same value of any item. This means that not only did your costs inflate, so did the value of your product. We clearly see that today with wages. If you’re selling a robot today and focusing on a 10 percent increase in input costs due to inflation, you might be missing the bigger picture. In many instances, labor costs have surged by 30 percent, implying that the value of your robot has also increased by 30 percent. Consequently, you should be in a position to capture a reasonable portion of those gains.

This decision should be grounded in a thorough analysis of the price-value equation, considering whether current prices accurately reflect the value delivered. In many cases, we see the value axis overlooked today and more opportunity for businesses to continue to grow than headlines might have you believe.

Pricing Strategy: Embracing Strategy Over Reactivity

Front-line chatter suggests that businesses, when faced with the question of whether to lower, maintain or increase prices, often anticipate the distribution of strategies to be skewed toward lowering prices at 60 percent, holding at 30 percent and raising them at 10 percent. This perspective, however, is predicated more on reactive measures than on a strategic understanding of product value.

A more informed distribution would advocate for a balanced yet bold stance, where only 10 percent consider lowering prices, 40 percent opt to maintain their current pricing, and 50 percent increase prices.

This recalibration underscores the importance of informed decision-making over knee-jerk reactions to market pressures. It reflects a belief in the inherent value of the product or service offered, advocating for a pricing strategy that mirrors the confidence an organization has in its value proposition.

Growth Through Confident Price Leadership

The recent period of inflation and compounding macroeconomic headwinds served as a catalyst for a reevaluation of pricing within organizations. For leaders, the challenge now lies in how they command the complexities of pricing strategy, making informed decisions that balance immediate financial needs with long-term strategic goals. For many organizations, there is no reason to return gains earned by increasing prices. Be bold. Be the leader who tackles the tough pricing strategies with confidence and prepare for sustainable growth.