Considerations for handling price hikes

As the word ‘recession’ starts to hit the headlines, we continue our theme of how businesses can respond to the rising cost of living.

This week we shine the spotlight on how to navigate the inevitable price hikes.

It’s no secret that many industries are struggling to contain the continuing increase in costs of production, with businesses grappling with the dilemma of passing these costs on to their consumers at a time when they are struggling to pay the bills.

How can businesses remain responsive to their customers’ needs while at the same time attentive to the commercial pressures they face internally?

We only need to look to the UK energy sector to gather some recent examples of what can happen when cost increases are passed on to customers in the wrong way. Bulb Energy was the UK’s seventh largest energy supplier with a proposition built around providing greener energy at fairer prices. However, its ‘fair prices that stay fair’ promise was increasingly difficult to uphold in the context of soaring energy prices. When it did eventually pass these costs on, there was public outcry from its customer base – accusing the business of ‘using them like a bank’ to fund its way out of financial crisis.

So how do you handle this situation in a way that keeps everyone happy? Last week my colleague Jacob shared ways that businesses could adapt their offer to retain customers by offering trade-downs or optimising the value proposition. But if your hands are tied and the only option really is to raise your prices, what do you need to consider?

Ultimately a compromise needs to be reached – one where both sides bear some, but not all of the pain. The key is determining how much pain your customer will realistically be able to bear. And if they can’t bear it, the extent to which they will defect to a more affordable competitor or fall out of the category altogether.

This depends on a multitude of factors: what your typical customer profile looks like on key factors such as affluence, how loyal or ‘sticky’ they are to your brand, the extent to which you are operating in a discretionary versus essentials category, and of course, the attractiveness both in terms of value proposition and brand equity of your competitive set.

For example, if you operate in a relatively niche or non-commoditised category, you probably have more room for manoeuvre on increasing price compared to more competitive sectors. But this only holds if your competitors are behaving in the same way and there are no disruptive forces at play. Warby Parker in the US for example, saw tremendous success during the last recession after it spotted a gap in the market for on-trend, affordable eyewear. As people began to buckle down on their spending, it presented them with a compelling alternative to switch to.

This example demonstrates that as obvious a solution as price hikes may be, it needs to be handled delicately. At Incite we have developed a range of ways to solve our clients pricing challenges – from the straightforward to the highly sophisticated.

If you want to find out more, get in touch.