Navigating Inflation

Set the right prices to maximize your revenue and profit potential

By Andrea Hill

(Originally Published by MJSA April 2024)

When history remembers 2022-2023, the word “inflation” will likely be at the top of every list. As costs for raw materials, labor, and logistics increased, so did the price tags for most consumer goods. While some companies were heavily criticized for taking advantage of the situation to bloat prices (and profits), other companies seemed to get by without many price increases.

But everyone’s costs went up, so did some companies simply eat the difference and reduce margins? Maybe, but that would have been to their detriment. Instead, savvy executives did something slightly different—a strategy that gave them more room for margin without angering their customers. They optimized their prices.

One of the unsung heroes of marketing strategy, price optimization is the practice of tweaking prices to maximize revenue and margins while maintaining the satisfaction and trust of customers. Price optimization is a nuanced process that takes into account factors such as market demand, competitor pricing, and consumer behavior.

How to Optimize Prices

Price optimization involves looking at products both by category and individually, so you need to make time for it. Here are the steps involved:

1. The first step is to gather data on market demand, customer preferences, competitor pricing, and product costs. This data provides valuable insights into pricing dynamics. By putting your prices, costs, competitive prices, and some sort of demand score on a spreadsheet, you will begin to see prices that are a bit higher than they should be, and prices that are a bit lower.

2. Not all customers are alike, and their willingness to pay can vary significantly. Segment your customers based on factors such as demographics, buying behavior, and price sensitivity. Now look at which groups of customers buy which products. You may find that some of your products sell primarily to more price-sensitive customers, and some products sell primarily to customers focused on quality, or for whom rapid shipping or turn-around times matter more.

3. For your first pass, look for products that appear to be low-priced compared to the market. You may find some products already have excellent margins but are still priced lower than your competitors. Don’t be afraid to raise those prices to get in closer alignment with what customers otherwise would expect to pay. There’s nothing inconsistent about making extra margin while also providing good value.

4. Once you’ve leveled up your lower-priced items, look for opportunities to raise prices on the rest of your products relative to who is buying them, what competitors charge for them, and how readily available (or not) similar products are in the market.

5. Price optimization is an ongoing process that requires continuous monitoring and refinement. At least once each month check the sales of the items you’ve raised prices on relative to their historical sales volume. Use this data to iterate and refine pricing strategies over time.

It is possible that raising a price on a product could reduce sales, but that’s not always a bad thing. For example, if you sell 1,000 pieces of an item that sells for $1.00, you get $1,000. If you raise the price to $1.05, then you need to sell only 952 to get the same $1,000. So, your sales would have to drop by more than 48 pieces to drop your sales below previous levels.

Very small increases of this type, spread over a lot of products, can bolster your margins without upsetting customers.

Across-the-board markups might be fast and easy to manage, but you pay a tax for that simplicity. The best pricing strategy is to set the right price for customer acceptance while also maximizing your revenue and profit potential.