In the ongoing pursuit of recovering from the Covid-19 setback and raising revenue and profitability amid escalating costs, it’s a dilemma for the organisation to decide if it’s more important to reduce costs or increase revenue?
Reducing cost without compromising on the value proposition offered to the customers on which the very same business was built. At the same time the income levels of the customers have not been restored to the original levels yet. And the sharp inflation and other adverse developments on the back of the pandemic have depleted the disposal income of the majority of the customers. Can or should you still push for a margin correction?
The answer to this complex question depends on many factors, including the type of company in question, industry trends, competition and market conditions. Each strategy has its own benefits and drawbacks – but which is best for your company? If a company chooses to raise revenue, where is the best place to start with? One common strategy for increasing revenue is to establish higher prices but what would happen to your competitiveness? Will the increase in revenue be greater than the total margin erosion due to the price increase?
Does the theory work?
The theory is that; customers typically do not choose something solely based on price, but on quality too. Most customers will pay more for a product or service that they think is made well or exceeds standards. Quality products help to maintain customer satisfaction and loyalty while reducing the risk and cost of replacing inferior quality goods. Would this theory work in the present environment?
On the other hand, reducing costs also can increase profitability, but only if sales prices remain constant. If cost reductions result in a lowering of the company’s quality, then the company may be forced to reduce prices to remain at the same level of sales.
Try both
If a company can reduce costs by optimising the supply chain, manufacturing operations, personnel and facilities without having an impact on quality, sales price or sales volume, that will provide a path to higher profitability. Can you reduce costs with all the cost escalations due to the pandemic? When it comes to maximising profits, raising revenue and minimising costs can help companies reach their profitability goals. It is up to the company to decide which strategy will work best for them and their unique challenges. To help manufacturers with these goals, There are a variety of tools targeting quality, costs and efficiency.
The starting point for developing a new pricing strategy is to better understand how customers perceive the value of a product or service in an environment where consumers themselves are beaten with many challenges, and therefore what price they can or are willing to pay.
On the surface, value is a subjective concept at best and impossibly vague at worst. This makes the process of determining and articulating it the single most challenging hurdle of a pricing strategy. Consider the challenges: if the seller cannot fully identify the value that its product or service brings to its customers, the set price will inevitably be off-mark. But these theories do not hold water in the present environment. Businesses have to stay afloat to continue to serve the customers.
Set realistic expectations
Organisations are forced to bring down their profitability targets and survive in the current environment for medium to long term stability. And for survival too you may have to raise prices with supply chains breaking down, deprecating local currency, fuel price hike and numerous other cost escalations beyond comprehension.
Finance cost has skyrocketed with having to meet social liabilities such as taking care of the employees with borrowed capital. Newest cost increase for manufacturers is the challenge of buying dollars from banks to pay the foreign suppliers. Customs has no sympathy for delays due to none availability of dollars in the banks.
Demurrage is charged fully and with penalties by the customs with no sympathy. Companies have no capacity to absorb any further cost increases.
What can you do then? This is where creativity and strategic alignment comes into play to curb losses. Balancing short term results vs longer term stability is the right approach but price increase in this environment is inevitable to be in the game. Engage all leaders – brain storm for days and weeks – think revolutionary. Don’t be afraid to take hard decisions and work hard to make them succeed. There is no perfect time to adjust the prices anyway.