Last reviewed 15 September 2023
Effective pricing can be a puzzle for exporters. There’s a fine balance to be struck which involves understanding costs and market expectations. Throw the highest inflation for 40 years into the mix and we have a third dimension, as well as a scenario that keeps changing. Here we offer some tips for effective pricing in a time of inflation.
There was good news in December for the United Kingdom. After rising to the highest levels seen for decades, inflation (defined by the Consumer Price Index or CPI) fell slightly from 11.1% to 10.7%. Fuelled by a toxic mix of global factors, prices around the world have been rising at rates most of us haven’t seen in our working lives.
There was a time when inflation seemed like a part of modern life. Initially fuelled by rising fuel prices, it was normal for inflation to be in double figures, even as high as 25% for short periods, and business learned to live with it. Prices were revised every few months, perhaps even more frequently.
After decades of low inflation, it comes as a shock to be faced with managing the impact of rapid and often erratic changes to prices and costs. Raw material import prices are potentially affected by underling rises in costs, fluctuating exchange rates and erratic shipping rates. Brexit has introduced some compliance costs that are significant for some companies.
What to do?
So what do we do? Managing sudden changes in costs through price changes is a fine art. Are costs going to keep on increasing, stay where they are, or perhaps even come back down a bit? If I’m going to impose price rises on my customers now, perhaps I should try to anticipate where they will be in a few months, rather than have to go back through the whole process again. Maybe I think we can ride out the situation, and anticipate a fall in prices later? And what if I do increase my prices and customers stop buying?
The first thing any exporting company should do is gather the facts and consider them carefully. Which costs have risen? Which haven’t? How is it affecting our margins right now? What undertakings can we get from our suppliers about future price levels? Can we use our buying power to reduce costs, for example by guaranteeing minimum order levels, or by buying in advance?
It’s crucial in exporting to understand our costs. On the one hand, exporting involves costs that don’t apply to domestic sales. Shipping, customs compliance, currency exchange to name a few. On the other hand, don’t forget that some business costs don’t apply to exporting, such as the home sales force, domestic advertising, etc. Be sure that you are accounting only for costs that a apply to exporting in your calculations.
Examine all options on costing carefully. Are there ways to economise?
Properly armed with knowledge of our real costs, and some notion of what future changes to expect, we then need to look at trends in our export markets. What will the markets bear? That involves looking at local price trends, examining what competitors and suppliers of non-competitive but comparable products or services have already done. Because while exporters must never lose sight of their own costs and the need to protect margins, the major factor determining export pricing should be local conditions and expectations.
At a time of higher inflation, pricing decisions need to be imposed in good time and communicated clearly. Contracts with buyers may well stipulate a minimum period of notice for price changes. So expect buyers to increase orders in the short term to beat the rise.
Communicating change
When communicating information about price changes, set out the changes clearly as well as the date from which they come into effect. If you have comparative information, such as changes to competitive prices in your customers market, refer to it. Show that you believe the rises to be fair.
Look for ways to sweeten the pill. If a major factor in your costs is increases to freight charges, see if you can offer better prices for larger order quantities. Perhaps you are in a position to offer slightly more generous payment terms?
After years when many prices have been steady, or even completely unchanged, a sudden rise in price can come as a shock, and the exporter should expect protests. That’s why it’s important to be sure that the revised prices are the best you can offer and to look for ways to lighten the impact. Exporters will know their customers, but my experience has been that breaking news about price increases is usually best initially done either face-to-face or via a video call rather than via email. Stress what you have done to mitigate price rises, such as any economies the business has already made or is undertaking. Offer short-term help to manage the changes, such as marketing material or funding to help with local promotions.
Above all, show the customer that you see the impact of rising costs as a shared problem, rather than just imposing increases without any thought for the consequences.
Bear in mind that, while economists seem to believe that the current inflationary pressures will ease in 2023, nobody really knows for sure what the future will bring. You could find yourself going through the same process again in 12 months, or perhaps even sooner. Take a careful look at the terms and conditions of contracts you have with your customers. Do circumstances warrant any changes, such as the notice period for increases?
We’ve all got used to sustained periods of very low inflation, and business practices have in some cases come to take that for granted. When revising prices, take any necessary actions to “future proof” your terms of business. Hopefully, we won’t see a return to long-term double-digit inflation, but if we do, we need to be prepared.