Price adjustments: between need and opportunity

Running is a great physical activity, and in recent times it gains more and more fans, captivated by the trend “running”.

When we first start running, and decide to participate in a competition, the goal may simply be to reach the goal. After all, it’s not too bad. However, as we train and feel more confident in ourselves, we do not settle for just reaching the goal. Now we want to continuously improve our personal brands.

How does this relate to price adjustments?

Reaching the goal is precisely to make price adjustments reach the cost increases: a need. Overcoming personal brands means making strategic price adjustments: an opportunity.

There are two major types of price adjustments:

  • Inflatable
  • Strategic
  • Inflation Adjustments

They have as main determinant the increase of costs that affects the company. These costs include inputs, human resources, logistics, services and structure costs, among others. Variations in costs resulting from the exchange rate (imported inputs or services) or in taxes levied on the company may also be included.

Increases in costs generally result from factors outside the control of the organization (exogenous factors), and usually affect all firms in the market. This generalization reduces somewhat the usual resistance generated by price adjustments. On the one hand, there are public reasons explaining the increase, and all competitors are encouraged to make similar decisions.

This does not mean that it is equally challenging to make such price adjustments. Some clients maintain harsh negotiating stances, trying to defer application of the increase or reduce the requested percentage. Likewise, competitors do not usually act in a coordinated way. Some choose to delay the application of the new prices, or transfer only part of the cost movement to prices.

The company’s support elements in the negotiation and implementation of inflationary adjustments are: sectoral price indices, cost indices, key input prices, evidence of adjustments applied or planned by other companies, as well as the journalistic coverage of the movements of costs, which gives public notoriety to the situation.

It is important to note that inflationary price adjustments are not optional, they are a matter of company survival. This type of price adjustment does not improve profitability. It simply allows you to maintain the previously achieved level.

Strategic Adjustments

In strategic adjustments, costs are not the main determinant. These are opportunities to adjust prices to capture a greater portion of the value that the company is creating. This type of adjustments is those that allow to boost the profitability of the company.

Although the previous category (inflation adjustments) was already a challenge to implement, strategic price adjustments are doubly challenging. Here the arguments of the company, the internal and external communication efforts must be much more careful and analyzed. Anyway, well worth the effort. These kinds of adjustments are what really make the difference. To implement them, a professional approach to price management is essential.

The management of strategic price adjustments is what differentiates the companies that have taken control of their prices, those that simply move to the market, with no margin of action on their prices.

Case: Implementing a Strategic Adjustment

How to take advantage of this type of opportunity? One of my consulting clients, a nationwide direct sales company, had a chance with its flagship product. A redesign of product aesthetics would be announced to the market as a renewal of this high turnover item. The costs of the redesign, coupled with the impact of inflation on costs, indicated a certain percentage increase suggested in prices: an inflationary price adjustment. However, after a deeper analysis, complemented by a “market price test” on a sample of key customers, an opportunity was identified: a strategic price adjustment. The value that the customers attributed to this renewed product, far exceeded the prices charged, even adding the additional costs.

Then a strategic price adjustment (above the inflation adjustment), would allow to capture an additional value, and thus increase the profitability of the company. In addition, the opportunity was optimal, as the announcement of the relaunch of the product reduced the frictions that would have occurred to make the adjustment on the product unchanged.

The company grabbed the opportunity and succeeded in successfully implementing the strategic price adjustment, and thus boosted its profitability.

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