Pricing Strategies for 2024: Outpacing Competitors and Boosting Margin
Author: Avy Punwasee
In the ever-evolving world of business, staying competitive and maximizing profitability is a constant endeavor. Pricing, often considered the unsung hero of profit generation, has the potential to play a pivotal role in helping businesses outperform their competitors in 2024. To capitalize on pricing potential, every organization can master a few essentials of pricing: identifying and using the key pricing levers for 2024 and the best practices in budgeting for pricing.
The Pricing Process: A Hallmark of High-Performing Companies
First, a little motivation to include pricing in your strategy and budget for 2024. The 2023 Survey conducted by Alexander Group Inc. and Revenue Management Labs* revealed some compelling insights about the correlation between pricing practices and business performance:
Annual Repricing Reviews: High-performing companies are more proactive, with 80% engaging in annual repricing reviews, compared to 56% of low-performing companies. Regular reviews are essential to adapt to market dynamics.
Supply and Demand Management: A staggering 73% of high-performing companies use pricing as a tool to manage supply and demand, while only 44% of low-performing companies do the same. This emphasizes the need to employ pricing strategies that align with market conditions.
Ignoring Price Elasticity: Surprisingly, 51% of low-performing companies do not review price elasticity, regardless of their performance. Understanding price elasticity is essential for optimizing pricing strategies.
*The joint Alexander Group Inc. and Revenue Management Labs 2023 CEO survey reached out to more than 300+ companies with a minimum of $150 million in annual sales.
Three Budgeting Levers to Drive Profitability in 2024
Going into 2024, companies must pull the right pricing levers. In brief, there are three essential budgeting levers to consider to drive net price: price optimization, being more efficient with discounts and promotions, and mix management. Price optimization involves raising list prices, which is a commonly used and quick-to-implement approach but may lead to customer pushback due to its high visibility. The goal here is to apply price increases strategically.
Discount and promotion strategy focuses on reducing discounts to ensure they drive incremental revenue, offering low client-side visibility and account-level flexibility but requiring advanced analytics and potentially encountering resistance. Mix management, centered on premiumization, is an underutilized lever that can provide enhanced customer value and drive transformative changes, though it demands a deep understanding of customer needs and significant sales effort.
Budgeting for Pricing: Best Practices
It is one thing to budget for pricing but another to effectively allocate resources for setting and managing prices. Effective budgeting for pricing requires meticulous planning and consideration. Here are some best practices to guide your approach in 2024:
1. Market Benchmarking
We first recommend market benchmarking for price to assessing your performance in the three key areas below and to set a standard for which you can compare your performance in 2024.
Assess Market Trends. Here you want to focus on the movement in the market across price and discounts, customer buyer behavior, regional differences. Your analysis can help identify whitespaces and opportunities to increase market share, price, and margin.
Price Position: Analyzing your price position involves assessing how your product or service is priced in relation to competitors and the market. We recommend identifying your key competitors and evaluate your price and discount position relative to them. Then, understand how competitors typically adjust pricing strategies and assess regional differences.
Value Offered: Evaluate the value your product or service offers compared to the next best alternative. This is a good opportunity to overlay your customer segmentation and where these unique customer groups find value.
1. Understanding and Anticipating Your Pricing Cost Structure in 2024
Understanding and anticipating your pricing cost structure is a critical aspect of pricing strategy and fiscal management for any business. Companies use this information to adjust prices in anticipation of cost increases. This is an essential step but just the bare minimum of how this information can impact your bottom line.
We have split these into internal and external cost drivers and have identified below several key components that make up the cost structure associated with pricing your products or services:
Internal cost drivers for pricing are the factors within a business’s control that influence the cost structure associated with delivering a product or service. They can include supplier or vendor prices, overhead costs, and transportation costs.
External cost drivers are outside a business’s direct control and can significantly impact a business’s cost base. They may include inflation induced rising input and raw material costs, upward shifts in labor costs, and supply chain bottlenecks such as what we saw during the pandemic.
How High Performing Companies Applied Cost Structures to Pricing Strategy
In response to the disruptive market conditions witnessed in 2022, high-performing companies adopted a multifaceted approach that clearly diverged from low-performing companies:
Raised prices in anticipation of inflation.
Built solution-based value into their product offerings to improve their competitive pricing position.
1. Focus on Driving Incremental Profitability through Mix Management
Inflation is clearly slowing though not at the rate federal banks would consider ideal. From June 2022 to June 2023, the Consumer Price Index (CPI) dropped by 59%, according to the U.S. Bureau of Labor Statistics. Slowing inflation means that inflation-based pricing is becoming increasingly unfeasible as a pricing strategy.
If raising prices remains your sole strategy, we predict a few outcomes. Profit margins will become increasingly squeezed as real-time cost data constantly evolves. Competitors will seize the opportunity to lead price and expand profit margin capture.
The question becomes how to realize price increases without the visibility of changing prices. First, developing granular customer segments by region using behavioral metrics. The second is to identify whitespace opportunities in the following areas: total out of pocket, new pack sizes, and additional unmet needs.
In the face of slowing inflation, companies need to consider the long-term implications of pricing strategies and prioritize those that drive sustainable profitability. In preparation for 2024, it is essential to:
Assess your current price position against competitors in the market.
Develop a deep understanding of your cost structure to enable value-based pricing.
Enhance long-term customer value through strategic product and service mix offerings.
In conclusion, pricing is not just a number; it is a dynamic and strategic tool for unlocking profits and outperforming competitors. By budgeting for pricing at a granular level, pulling the right pricing levers in 2024, and adhering to best practices, businesses can navigate the competitive landscape with confidence and drive sustainable profitability.