Now that Donald Trump has been elected to be the next President of the United States, companies are looking at his campaign promises and cabinet appointments to assess what it means for their business. In particular, companies are anxious about how a Trump Presidency will affect their cost of doing business. This is all happening at a time when many companies are setting their base prices for 2017. My advice is to remember that pricing is not a cost-based exercise. Your pricing strategy should be aligned with how you compete and how you provide value to your customers. Consider whether your customer’s perception of value could change, and if so by how much. Let that guide you in setting prices.
So far there are indications a Trump Presidency can be both positive and negative for business. On the positive side, it appears we can expect:
- Fewer regulations affecting hiring, construction, and business creation
- Potentially lower health insurance costs
- Potentially some protection for US manufacturers from renegotiated trade agreements
On the negative side, we might expect:
- Higher costs on imported components and supplies from new tariffs and renegotiated trade agreements
- Potentially higher tariffs from countries to which US manufacturers export
- Higher labor costs from restricting immigrant labor
- Punishing companies that try to lower their costs by opening plants in other countries
We frequently tell our clients, “Your customers don’t really care about your costs.” While they recognize that you may feel the need to pass on changes in your costs in the form of higher prices, your customers really care about how their own businesses or livelihoods are affected.
With that in mind, consider your customers’ next best alternative. If you and all your competitors are experiencing the same cost changes, you can probably expect consistent reactions from your customers. That is, if the costs of imported products have increased due to higher tariffs for all competitors, your customers may grudgingly accept price increases. However, you can also expect those customers to explore their options.
The opposite situation might be one where you and all your competitors are not affected by imports or exports, but your costs decrease because of reduced regulation and lower health insurance. (Okay, maybe that is just a dream.) There is no reason to automatically lower your prices. The value you have been providing your customers has not changed. Unless they have some new, alternative that lowers the value equation, keep your prices where they are.
The most likely scenario is you are competing with domestic and global competitors, and the impact of the Trump administration will be inconsistent. In that case, consider the problem from the customer perspective and work backward. Before considering prices, try to quantify how your product or service affects your customers’ results. If you enable customers to generate revenue or control their costs more efficiently than they can with the best alternative, quantify how much that is worth. Then make sure that is aligned with your prices.
If your prices are already aligned well with your customers’ value equation, don’t try to raise prices just because your costs increased. On the other hand, I find that client prices are not always aligned with the value equation and they actually have a little room to raise their prices. Make sure you do the math, though. Raising prices when there is not a supportable value difference can frequently cause customers to defect.
If you are in a position where your prices have been competitively aligned, and your costs are increasing faster than your competitors – find another way to adjust. Look for a way to add more value and disrupt the current offerings, or look for options to get more efficient in providing your products and services. Perhaps you can capitalize on lower indirect costs from reduced regulation or lower health insurance costs to offset the costs that are increasing.
The point of all this is to avoid the knee-jerk reaction of changing prices in step with your cost changes. Your pricing strategy should be determined by the value you provide, not how much it costs you to provide it. There will probably be changes in your cost structure resulting from Trump Administration policies, but letting those changes dictate your prices could make your results worse instead of better.
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