Red flags your pricing needs review
When it comes to looking at pricing, there can be an ‘ostrich in the sand’ approach of never looking at it and just hoping that its enough to cover costs, or at the other spectrum constantly looking at the prices that competitors charge in the market and worrying that your product is too expensive (or too cheap) and changing price all the time. This is confusing for consumers and a real headache for dealing with Retailers if your list price swings around too much,
While there is no ‘right’ time to change your price, there are definitely red flags within your business that you should keep an eye out for including:
You don’t have enough profit to cover monthly costs
You don’t have enough cashflow to buy future stock
You haven’t got any provision for your time cost
You don’t have any wiggle-room for unexpected changes in trading terms or Retailer costs
You don’t know how much gross margin you make on each item
You don’t have a good handle on your cost of goods and overheads
You haven’t looked at your pricing in the last 12 months
You haven’t looked at your total pricing model since you launched
You haven’t set clear metrics for tracking
You don’t feel confident approaching new Retailers
Your sales aren’t moving despite lots of marketing activity and spend
You get a lot of attention from customers but high abandoned cart
You’ve got some slow-moving products that are dragging down cashflow
If we look closely at the red flags, there are some natural challenges that go together; and ways of tackling them to work out what next.
1: PROFITABILITY problems - where you’re unable to cover costs, have enough funds to invest for growth or to give you a return for your time.
Break-even on cost of goods is a recipe for break-down of not only your business, but also your personal wellbeing. The stress of an unprofitable business or constant cashflow crunch is one that all too many small business face and can crush even the most optimistic spirit.
Talk to your accountant about cashflow and budget planning, and work through
Work through your margin model, retailer margin assumptions, promotional spend and cost of goods.
Set up a regular review cycle to understand how your gross margin and net margin are tracking, and where you can make price adjustments.
Consider making different price changes to different products depending on the role and impact they have on volume for your business. If you can lift the price of a high volume line by 5%, then it should deliver significantly more to your bottom line than if you lift the price of a slow seller by 10%. At the end of the day its about putting money in the tin and working out the pricing that delivers profitability to your business.
2. REGULAR MAINTENANCE & REVIEW. Setting initial prices can be a literal ‘throw a dart at a price and hope it sticks’ approach, and during times of low inflation it kind of worked ok so long as monthly costs were covered.
Set up a regular review cycle to look at what is happening in the market in terms of competitor shelf prices, promotional prices - including bundle offers, and the level of extra discounts and costs that may be creeping into your costs.
Keep a close eye on your cost of goods, and understand where the ‘pinch points’ are in your products. This could be sourcing for a particular ingredient that’s in short-supply globally (so you need to know what your alternative could be) or a certain type of packaging that reflects your brand and is a key part of your brand identity.
Review your packaging, ingredients and raw materials suppliers at least every 1-2 years to make sure that you’re still getting a good price and quality to align with your brand.
If your business is growing rapidly, then consider whether you can negotiate for better bulk deals or move to new manufacturing options to give better (lower) cost of goods
Keep track of what’s happening in the market with your direct competitors and other alternatives in the market. The latest inflationary environment has caused many to reconsider their shopping and you might start to see people moving from one product to another in your range with unexpected impacts on profit if you’re unable to meet demand.
3. SALES & MARKETING are negatively impacted by pricing that doesn’t give confidence or align with consumer expectations. It could be that your pricing doesn’t align with your brand positioning and packaging causing consumer confusion, or you’re not offering attractive entry level offers to get trial, or loyalty/ bundle offers for regular consumers. There are a few signs that you can see whether you’re selling online or in retail that are worth digging into further.
Abandoned cart. One of the biggest causes for this is unexpected high shipping costs causing a ‘sticker shock’ when it comes to final payment. Consumers have a basic understanding of shipping costs but with the constant changes in courier costs there can be unexpected ‘total’ costs once shipping is added.
Consider adding in a portion of shipping costs to your base price costs so that you can maintain a perceived lower total cost and reduce potential surprise at checkout.
Be careful not to move to a low cost courier to save a few dollars as you can end up with even bigger customer service headaches, and costs in both replacing products & your precious time by having to chase up late deliveries or damaged stock.
Sales aren’t moving. The natural assumption is that your price is too high when it comes to slow moving products, but there can also be the problem of price too low which can imply either a poor quality product or one that isn’t worth the investment for consumers.
Talk to both your current consumers as well as those who are NOT buying (trade shows or Retailers that have said ‘no’ are obvious places to start for rejections) and try to understand what is causing the problem.
It might be that the pack size is much bigger than competitors so while the price per serve is competitive, the sticker price feels expensive for consumers and they don’t have the disposable income to buy in a single purchase. This is why you often see vitamins and supplements in one month packs rather than two or three months, so people can spread out their cash and make it feel like its going further.
Slow-moving products dragging down cashflow. Not every product is going to sell at the same rate, but your pricing can really hold up your cashflow if you’ve sunk too much into a few lines that just aren’t firing.
If it’s a few slow-moving items that are impacting your cashflow due to high capital tied up in them, then your best course of action is to get rid of them quickly if they no longer align with your brand or consumer needs. Run a special clearance (ideally for a short-time or through a separate channel so it doesn’t impact perceptions of your core brand).
Look at whether you can create any attractive price bundle offers to sell through stock, find others to partner with for promotions & sales, or find a new sales channel if its a ‘must have’ product that helps with your overheads or operational efficiencies.
The solution to tackling these challenges ISN’T to take a generic increase across the board and hope it all works out - or worse, ask your accountant ‘what should my price be’. The expert in pricing for your business is YOU, and its part of running a business to understand the role that pricing plays in achieving your business goals. By setting up a regular review cycle, getting some expert outside advice and keeping on top of your profit & performance, you can avoid the red flags that trip too many small business up.
If you need expert review of your pricing or are struggling with any of the red flags above and want to talk more - get in touch at hello@pitchfork.co.nz. We’ve got tools and methods to help work out where the pressure points are and what you can do to get into action and resolve.
