SAFE STRATEGY TO PRICE INCREMENT ADMITS INFLATION

Inflation is a measure of the rate of rising prices of goods and services in an economy. Inflation can occur when?prices rise due to increases in production costs, such as raw materials and labour. A surge in demand for products and services can cause inflation as consumers are willing to pay more for the product.?[Nigeria January 2022 Inflation Rate Almost Steady at?16.91 - 15.6%, - in 2015 it was 9%]

It is no news of the ever-so-obvious decline in investment inflow in the Nigerian tech space in recent months due to over-valuations and the global decline in funds circulation.?This article will not focus on the topic of funding but more on how to deal with such inflation as a tech start-up and probably other business types, with a key focus on Pricing.

The economy has entered a bit of uncharted territory, with seemingly persistent inflation, which most of us have never experienced in our careers. This is combined with a challenging labour market and low unemployment, stock market turbulence and global conflict. Tech leaders might think they’re immune to these externalities, but inflation can impact our operational and strategic activities.

Here are 5 questions I often ask to help manage and mitigate these impacts.

?1.????What asserts are you spending on?

Most tech companies will likely if not already done amass a pool of expensive assets, from laptops to smart devices, to data centres, POS terminals and others, with inflation these items will most certainly cost more. Savvy tech leaders can use this time gap between rising inflation and its impact on prices to their advantage. Accelerating significant asset acquisitions, locking in current pricing, or moving expensive assets off the books through techniques like cloud adoption are obvious ways to save money. Also, consider extending the lifespan of your existing tools or infrastructure if the replacement timeline is close.

?2.????How much do your people cost?

A significant driver of inflation has been rising salaries, and you’ve likely experienced increasing costs for new staff and demands for pay increases from the current team, If you’re merely throwing your hands in the air and assuming you’ll be unable to compete in the current talent environment, you’re doing the wrong thing.

?Consider non-salary benefits or benefits with high perceived value and lower costs than additional salary. For example, flexible working locations and hours may cost little in productivity but may provide an edge against your competitors.

3. Are you maintaining a budget?

With a carefully kept budget, you’re able to both account for and compensate for inflation. You can also identify where you might be spending money outsourcing when you could instead do things in-house, where it’s easier to minimize the impacts of inflation.?

?Beyond that, a budget helps you identify the nice-to-haves for your business, along with the necessities. That way, if inflation forces you to cut some costs quickly, you’ll already know where you can trim the fat.?

?4. How predictable are your cost variations?

This is often one of the most overlooked areas of cost savings, in the excitement of something new or getting a well-priced supplier, we forget to lock down the price with a contract which then opens us to multiple price variations that hits us during inflations.

?When you do have to rely on outside vendors for the functions of your business, an established contract protects you from a sudden, unexpected increase in expenses. the contract buys you time and provides you leverage to keep expense increases at a minimum.?

?5. Are you changing your price?

Many reasons that if they are paying more to buy what they need to deliver their goods to your customers, then customers and clients should pay more to receive them, right??

The problem is that inflation affects everyone. Your clients or customers are feeling the very same pinch as your business. If you’re too quick to raise your prices, you risk making your client base feel like you don’t understand their struggle or, worse yet, are well aware of it and simply don’t care.?

If you can stand to stick with your current pricing for a season even when faced with inflation, you could win customers. If your competitors raise their prices, their clients might come looking for an alternative. With your unraised prices, you look like a particularly good option.?

Generally, during inflation, companies will do the following

·?????Raise prices,

·?????Accept smaller margins,

·?????or reducing product costs (and often quality).

However, let’s look at three larger strategic responses:

1.????Making changes to the product portfolio,

Price rises can also be masked. So, try to avoid raising prices when the product remains identical. Creating “new” (if similar) products with new prices allows the establishment of new reference transactions.

The more choices they have, the less unfair it will seem.?

Examples. Standard features with transaction volume and/or value of X can give you a price point of Z. However, if you want additional options 1, 2 and 3, you will be priced at Y, and this will bring your transaction cost to Q.

With the Above, the client or consumer will see that there are different product options and values they provide, and the option of paying for what they need will make the price increase more acceptable.

2.??Repositioning the brand

The practical implications are straightforward. When you increase prices, the best justification is by highlighting cost increases (although never lie). Note also that customers are more likely to accept a discount reduction than a price increase. Economically, it’s the same. But psychological perceptions are different. Loss aversion dominates.?

Option 1: Say your brand was designed as a B2B, can you consider a B2B2C approach? Also, if you were servicing a few clients whom you may consider as premium, with the price change necessity will you consider playing in the mass market?

Option 2: If your service were in a physical store, will you consider selling online? Or maybe selling through an intermediary and building out a new ecosystem position instead of owning the entire end-to-end value delivery.

3. Revamping the pricing model

Before raising prices because of higher costs, companies should seize the opportunity to recalibrate their overall pricing strategies and improve their organizational pricing capabilities. Managers should first update their insights on these other three considerations:

·?????customers’ willingness to pay,

·?????competitors’ prices and offerings,

·?????and capacity constraints.??

?Even if organizations know the optimal price, they must acquire and interpret meaningful customer and competitor insights related to willingness to pay. They also need to analyse the pricing economics of the organizations, and price elasticity in relevant markets.?

In the Tech Space, I have seen most apply the following price strategies.

Penetration pricing - price is set artificially low to gain market share quickly. This is done when a new product is being launched. It is understood that prices will be raised once the promotion period is over and market share objectives are achieved.

?Economy pricing:?no-frills price. Margins are wafer thin; overheads like marketing and advertising costs are very low. Targets the mass market and high market share [ this is often seen in the agency banking space with lean margins and market grabbing approach]

?Skimming strategy:?the high price is charged for a product till competitors allow after which prices can be dropped. The idea is to recover maximum money before the product or segment attracts more competitors who will lower profits for all concerned. [ This is often applied when its a first-mover scenario and usually when that works, everyone copies and the price needs to change]

?Finally, if you really need to adjust the price, remember that you need to do that intelligently and purposefully so that you do not lose market share, but are still able to sustain growth by still being appealing to the target market.