Should Small Businesses Use ‘Excuseflation’ To Achieve Gross Profit Increase? 🎈
Poor market conditions, increased competition, and outdated business models are causing profit declines for many businesses that struggle to achieve a gross profit increase. However, some industry analysts are noticing that there are corporations able to achieve soaring profits despite economic challenges.
The problem is though, this increase in revenue is said to be not because of increasing sales or improved business management but because of an inflation and price increase strategy called “excuseflation” where companies take advantage of business challenges to make their price hikes more justifiable. It may have benefitted a lot of companies but excuseflation is still a risky strategy.
In this article, we are going to discuss a new revenue pricing model trend many small to large businesses are hopping on, called excuseflation. We explain how companies use it as part of their price increase strategy. Then, we weigh its advantages and disadvantages. Finally, we recommend ways how businesses can utilise it properly with minimal risks. We argue that while it may seem that excuseflation is an effective strategy for justifying price increases, businesses must still be careful and strategic when joining this pricing trend.
At Value Culture, we believe that to achieve a gross profit increase, small businesses should be customer value-focused. Emphasising value rather than simply a new higher price can demonstrate how products and services are worth the added cost. By the end, you will know if excuseflation is a good price increase strategy for your business.
What is a good gross profit increase in a small business?
In a small business context, a good gross profit increase is one that not only contributes to profitability but also aligns with the business’s size and industry norms. Generally, small businesses aim for a healthy profit margin, which often falls within the range of 7% to 10% of gross profit.
Therefore, any gross profit increase that helps a small business consistently maintain or surpass this margin can be considered favourable. For example, if a small bakery with a 7% profit margin successfully increases its gross profit by 15% through cost controls or higher-priced offerings, it is achieving a good gross profit increase.
Furthermore, it’s essential to assess the source of the gross profit increase. A healthy increase should come from a combination of factors such as increasing sales, improving pricing strategies, or cost management. For instance, a small IT consulting firm that raises its hourly rates by 10% and simultaneously grows its client base by 5% demonstrates a balanced approach to achieving a good gross profit increase.
Lastly, the sustainability of the increase is crucial for small businesses. It’s not just about achieving a one-time boost but maintaining and building upon it over time. Small businesses should develop strategies that ensure ongoing profitability, which may involve nurturing customer relationships, diversifying product or service offerings, or exploring new markets.
Hence, a good gross profit increase in a small business is one that aligns with industry norms, derives from a balanced approach, and is sustainable, ultimately contributing to the business’s financial health and growth.
What are the most common reasons why small businesses struggle to achieve gross profit increase?
Presented below are the five primary factors that frequently lead small businesses to raise their prices:
1. Rising Costs of Inputs or Materials
Small businesses often rely on raw materials, supplies, and other inputs to produce their goods or services. When the costs of these essential components increase, it can lead to higher production expenses. This might be due to factors like inflation, changes in supplier pricing, or disruptions in supply chains. As a result, businesses may need to increase their prices to maintain profit margins.
2. Operational Expenses
Over time, operational costs such as rent, utilities, labour, and insurance may increase. For instance, if the lease on a business property is up for renewal and the landlord raises the rent, the business might need to adjust its prices to cover the higher operating costs.
3. Regulatory Compliance and Taxes
Changes in regulations, compliance requirements, or tax structures can impact a small business’s costs. This could involve higher fees, taxes, or the need to invest in new technology or processes to meet new standards. These additional financial burdens can prompt a business to raise prices to ensure its viability.
4. Market Demand and Competition
If demand for a small business’s products or services remains strong and there is limited competition, the business might consider raising prices. This is often seen when a business offers unique or high-quality offerings that customers are willing to pay more for. However, this approach should be balanced with market research to avoid alienating price-sensitive customers.
5. Economic Factors
Economic conditions, both local and global, can influence a small business’s pricing decisions. During periods of economic growth, businesses might be more confident in raising prices because consumers have higher purchasing power. Conversely, during economic downturns, businesses may be cautious about raising prices to avoid losing customers who are more price-sensitive.
What Is Excuseflation Strategy? Should You Use It To Achieve A Gross Profit Increase?
Increased prices are often necessary for businesses to remain profitable and continue to operate. The reasons to increase prices include factors such as inflation, rising costs of production, labour shortages, and market saturation. Inflation, for instance, erodes purchasing power and necessitates companies to raise their prices to make up for the lost profit margin.
When it comes to increasing prices, businesses will have to consider potential risks that could negatively impact the company.
The most common risk is customer backlash, which can be seen in decreased sales and customers switching to competitors. Increased prices can also lead to legal repercussions for businesses. If an increase in pricing is significant without proper justification, it triggers regulatory investigations.
Furthermore, price increases may be considered anti-competitive if they create barriers to entry for competitors or limit consumer choice and product access. Thus, it goes without saying that businesses are finding it more difficult than ever to justify price increases.
As a result, they thought of ways to achieve a gross profit increase such as excuseflation, as experts refer to it.
Excuseflation appears to be the new trend that large corporations are jumping on. Analysts believe it is the reason why prices remain high and corporate profits continue to rise.
Managers have long recognised the power of news and current events to influence customer perceptions. When an economic crisis, such as COVID-19 and Russia’s invasion of Ukraine, disrupted supply chains, businesses knew they could quickly raise prices because there would be less backlash from customers. This is what excuseflation means.
This pattern is being observed by an increasing number of analysts and researchers as large corporations use unexpected disruptions as an excuse to raise prices for their goods and services. When they raise their prices and discover that consumers are still willing to pay, the new price becomes the standard price. Companies rarely return to their lower prices. As a result, their profit margins grow. Should your business also use excuseflation as one of your reasons to increase prices?
Discussion On Using Excuseflation To Achieve A Gross Profit Increase
There is no one-size-fits-all solution for businesses experiencing profit generation issues. Excuseflation is an approach they can potentially take. Of course, using it as one of your reasons to increase prices has advantages and disadvantages.
PepsiCo is one of the most successful companies that has used this strategy. For example, the company has utilised the narrative that its price increases will compensate for volume sales losses in Russia and Ukraine. While some economists argue that consumers should eventually switch to lower-cost alternatives, this has not been the case thus far.
Even if demand falls, PepsiCo has no plans to lower its prices. Instead, they intend to create brands that represent higher value to consumers and for which they are willing to pay more.
Well, it may seem that excuseflation is an effective strategy for justifying price increases and growing revenues and profits. However, businesses must still be careful with this tactic. Thus, pricing managers must tread cautiously to avoid tarnishing their company’s reputation with misleading pricing, price gouging, and other pricing allegations.
Never forget to consider pricing regulations and customer value when setting profit growth targets. The success of excuseflation is dependent on customer trust and loyalty. Price increases should be transparently communicated to customers in order to ensure that they understand the reasons behind the change.
Companies should also consider strategies that can be implemented in conjunction with price increases to foster customer relationships and retain their trust. These include offering incentives, discounts, or loyalty programs.
Implications Of Using Excuseflation As A Strategy To Achieve Increase In Gross Profit
Price increases are an inevitable part of business, but when handled correctly, they can be a win-win for both the customer and the company. Well-crafted customer-focused reasons to increase prices allow companies to remain competitive in their markets by charging more for their products and services while also gaining customer loyalty during the process. By emphasising value rather than simply a new price tag, companies can demonstrate how their products and services are worth the added cost.
Set up a pricing team. Our findings show that with the right set-up and pricing team in place, incremental earnings gains can begin to occur in less than 12 weeks. After 6 months, the team can capture at least 1.0-3.25% more margin using better price management processes. After 9-12 months, businesses often generate between 7-11% additional margin each year as they identify more complex and previously unrealised opportunities, efficiencies, and risks.
Strengthen your commercial capability. Our findings show that when a business builds and embeds commercial capability across the business; bolstering its internal pricing skills and capabilities to build a sustainable pricing system, it can generate at least 3-10% additional margin each year while protecting hard-earned revenue and volume. This is at least a 30-60% profit improvement straight to the bottom line.
Excuseflation is a strategy for making price increases acceptable to customers. However, you must plan ahead of time in order to put it into action. To avoid backlash, it is critical to carefully plan and execute the price increase. The appeal to customer value is the most important aspect of a successful pricing strategy.
A business must be able to attract customers with products and services that promise value. Value can come in many forms – cost savings, convenience, quality, reliability and more. Understanding what matters to customers is essential to a company’s success, whether they choose to use excuseflation or not.
For a comprehensive view of ensuring the continuous growth of your business, Download a complimentary brochure on How To Drive Pricing Strategy To Accelerate Sales & EBIT Growth.
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