Matt Lewis: This January, don’t just discount everything – formulate a sustainable pricing strategy

The three questions business managers must ask

Matt Lewis is head of national markets for London at KPMG.

I was having a conversation with a wholesaler I know recently who is really busy at the moment as they have a January year end. That means customers are buying now to get volume rebates before their annual February price hike.

Why do they put up their prices in February? The trade expects it, so they just do it. They will only increase prices by a few percentage points this year, the business owner told me.

In many businesses, pricing is left to the sales department. They’re typically incentivised by sales rather than profit. Which means they might drop prices to hit their targets.

So I asked: “What do you expect the impact to be of that price increase?” And he sort of looked at me blankly and said, “What do you mean?” I said, “Will that price rise increase revenue? Or will it decrease revenue because when you put your prices up the sales volume goes down?”

He didn’t know, because he hadn’t thought through his pricing strategy. He was just putting up prices because it was expected and because his company was going through tough times.

But if you asked this wholesaler strategically what he was trying to do, there wasn’t really an answer. There was no pricing strategy – and I think that’s true of a few businesses.

Typically, businesses are just discounting at the moment. But discounting is a knee-jerk reaction to a short-term problem. It’s not sustainable as a long-term strategy.

Think, for example, of retailers going on sale in January to get rid of Christmas stock – to clear the decks. That’s how the model used to work. Except now the high streets seem to be on discount for much of the year.

Is your business model geared up to deal with that kind of price-cutting for a long period? It’s possible that this economic situation might last more like three or four years than one or two. Which means you need a pricing strategy that can last the distance, if needed.

Let’s come back to the wholesaler I was talking to who was looking at a small increase of a few percentage points across the full product line.

Actually, he could have put the price up more than that on some products because people really need them, and those products are in short supply. But he would have struggled to get price increases through on other items he sells, the bog standard stuff that all his competitors stock, because customers will simply go elsewhere where the prices have stayed the same or dropped. The wholesale company is a good business, but they had a very unsophisticated pricing mechanism.

Pricing should be a strategic issue, not a short-term needs-must one. It wouldn’t hurt for the board to be involved in pricing strategy.

It is so important to figure out which products you can increase prices for, and for which you need to keep prices constant or reduce. In a perfect world, you would know what would happen to demand if you changed your pricing on any product. Now, we’re obviously not in a perfect world, and most businesses don’t have the sophisticated systems the supermarkets do to get that kind of comprehensive data across all products.

But it’s good to have at least some information about which products make you the most money and which there is most demand for. Even if you identify a handful of products that make you more margin and are likely to withstand a recession, you can put more of your price increases onto those, rather than onto anything else.

In many businesses, pricing is left to the sales department. They’re typically incentivised by sales rather than profit. Which means they might drop prices to hit their targets. Actually, it would be better to educate them about which products earn most margins and incentivise them to hit profit targets instead.

The real issue underpinning all this is that managers are not spending enough time thinking about the issue! Pricing is a short term decision for too many businesses at the moment. They think: “Times are tough, so we’ve got to cut prices.”

But pricing should be a strategic issue, not a short-term needs-must one. It wouldn’t hurt for the board to be involved in pricing strategy.

Matt Lewis is head of national markets for London at KPMG.