Prices are constantly changing for the goods and services and we all use on a daily basis. For example, the price we pay for gas can change every day. Gas and other commodities are the extreme examples of fluctuations in price. However, it is important for every business to review pricing and adjust prices on a regular basis.
So, why should your business review and adjust prices? Many different factors affect pricing so we will just look at a couple of the high-level factors that affect pricing. One of the biggest and most obvious factors that affect pricing is the cost of goods. The cost of goods varies by business and by industry. For example, a company that manufacturers cotton t-shirts have costs that include cotton fabric, the ink for printing on the t-shirts, and the direct labor that goes into making those t-shirts. Our manufacturing clients will probably point out that this is an oversimplification of manufacturing costs, but let’s make some generalizations for example sake! The cost of cotton fabric, ink, and wages will fluctuate. These fluctuations should be considered when reviewing and updating pricing.
If you notice, it was stated that businesses should review pricing on a regular basis. Businesses that fail to review prices on a regular basis tend to never “catch up” to current market prices. Inflation is simply the buying power of a dollar. Below is a comparison of three different pricing strategies to highlight the importance of regular review of prices, using only inflation rates for the last ten years.
NewCo Inc. sells widgets for $100/each and those prices have been constant for the last ten years. So, the price of the widget ten years ago was $100 and the price today is $100 as well.
NewCo Inc. sells widgets and adjusts their prices every three years based on the inflation rate of the prior year. The price for the widget ten years ago was $100/each. Using historical inflation rates and adjusting the price for inflation every three years, the current price ten years later of the widget would be $103.82.
NewCo Inc. sells widgets and adjusts their prices every year based on the inflation rate the prior year. The price for the widget ten years ago was $100/each. Using historical inflation rates and adjusting the price for inflation every year, the current price ten years later of the widget would be $121.48.
The difference in pricing between all three options is significant and shows the importance of regularly reviewing prices. Changes in costs and using inflation rates are just a couple of the factors that can affect prices. Talk to your trusted business advisor and accountant to help guide you in reviewing prices!
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