In 2024, inflation is forecast at 2% to 4%, higher than the Federal Reserve would like but still an improvement over what it was following the global pandemic. With lower inflation and even cautious optimism for a brighter economic landscape in the new year, the window for large, across-the-board price increases has now closed.
How else can distributors drive profit in 2024 and beyond? With price improvement.
Price Improvement vs. Price Hikes
During and following the global pandemic, most customers tolerated price hikes. Challenging economic times brought new levels of understanding and need and, as a result, distributors fueled decent growth. As inflation comes down, it’s time to forego price hikes or risk appearing out of touch with even your most loyal customers.
An absence of blanket price hikes doesn’t have to mean lower profits, however. In fact, it can mean just the opposite when strategic price improvement measures are put in place. 2024 is the time for finding pockets of profitability. Get started using these three targeted price action steps.
1. Determine willingness to pay.
Understanding customers’ willingness to pay (WTP) is essential for setting optimal prices and maximizing revenue. Good-fit pricing also goes a long way toward delivering a superior customer experience. WTP is the maximum amount of money customers are willing to spend on your product or service. It represents the value that your customer perceives in your offering. Perceived valuation is influenced by various factors such as budget, alternatives available in the market and level of satisfaction with your product or service.
Calculating WTP can be done using historical transaction data, customer, product and deal attributes. This information gets segmented and can then be compared to other segments with similar WTP characteristics. The process can be time-consuming and prone to error when done manually – automation will speed up the process and generate more accurate results.
2. Find gaps in what customers pay today and what they would be willing to pay tomorrow.
If a customer pays $10 for your widget today, they might actually be willing to pay $15 for that same widget next time because they value the product, its features and their partnership with you. How can you know? By segmenting by customer types, geography, industry, etc., comparing historical transaction data can result in invaluable insights.
For example, if beer drinkers in the Northeast pay $20 for a 12-pack of your finest brand, and those in the Southeast have been paying $22 for a similar quality beverage, you might have room for price improvement across the Northeast.
3. Turn your sales team into sales champions; bring a list of opportunities.
Armed with detailed insights on WTP and the gaps of what people pay today vs. what they may pay in the future, you can create a list of targeted opportunities for the sales team. Trust me, there is nothing they would love more!
This target list along with strategic pricing guidance rooted in customer WTP will boost their sales, meet customer expectations and grow the bottom line.
WTP and targeted price action does take work. It also requires data and data analysis – which is a big reason behind data analytics being the most-sought-after skill in 2024, according to the Pricing Excellence Report and 2024 Outlook. But the payoff to this thoughtful work can be tremendous.
Price improvement programs will differ across business circumstances. One thing is certain for all, however: Automation will make the process much more efficient, and accurate. The time for across-the-board price hikes has passed. To improve your bottom line, turn to targeted pricing action.
Dan Cakora is a Business Consultant at Vendavo and has worked in various aspects of pricing for over 15 years. Dan started his career as a Field Economist responsible for helping to measure inflation for the federal government. Before joining the Vendavo team, Dan was a customer at a large, international B2B distributor. He has led Pricing teams, developed Pricing and Sales Enablement products, and has a passion for data visualization. Dan has an MBA from DePaul University and a BS in Economics from Purdue University.