What is a Pricing Adjustment?

A pricing adjustment is any modification made to the original price of a product or service. Businesses implement price changes in response to various factors, including market conditions, cost changes, competitive pressures, and strategic business goals.

There are several different ways to adjust the price of something:

• Promotional adjustments (discounts, special event pricing, limited-time offers, and cash rebates)
• Psychological pricing (setting prices at certain numerical values to influence consumer behavior)
• Segmented prices (different prices for the same product based on customer segments, product variations, location, or time of purchase)
• Geographical pricing (higher or lower prices, based on location or country)
• Dynamic pricing (adjusting prices in real time based on supply and demand)
• Price skimming (initially setting a high price and gradually lowering it over time)
• Penetration pricing (initially setting a low price and gradually raising it over time)
• Price matching (making a one-time adjustment to match a competitor’s price)
• Surge pricing (raising a price during periods of high demand)

For businesses, making adjustments to prices is one of the most important aspects of managing revenue and profitability. The price of a good or service significantly impacts whether or not a customer will value the product and make a purchase. So, price optimization and strategic pricing adjustments are often the determining factors of success.

Synonyms

• Price adjustment
• Price change
• Price modification
• Price alteration
• Price revision

Reasons for Pricing Adjustments

There are several reasons businesses change their pricing, but we can break them down into the following categories:

• Cost changes
• Market fluctuations
• Product value
• Competitive pressures
• Strategic objectives

Cost Changes

Cost changes are the most common reason for product price adjustments. Changes in raw materials, production, and labor costs sometimes force a business to increase the price of their product to maintain profitability.

Regulations are another cost-changing factor that influences pricing. When governments implement new taxes, change import/export fees, or increase labor, data, and product security requirements, businesses usually have to raise their prices to stay profitable.

According to Keynesian theory on the economic implications of sticky prices, the price of things is generally downwardly rigid. Since businesses are generally hesitant to lower prices (even when input costs fall), it’s easier for prices to go up than down.

Commoditized goods are the main exception to this rule. For example, a change in the cost of oil would reflect almost immediately in the price of gasoline. As another example, a t-shirt manufacturer purchasing cotton would enjoy savings from falling cotton prices (though they probably wouldn’t lower t-shirt prices).

Market Fluctuations

Shifts in supply and demand, customer preferences, or buying behavior cause businesses to raise or lower prices to keep sales up.

There are several ways this could play out. A sudden increase in demand for a product could lead to both a shortage and higher prices. In this case, the market is bidding up the price because they want more of it.

Or, if supply exceeds demand for something (e.g., fuel during an oil surplus), suppliers will lower their prices to encourage people to buy more. This scenario usually affects commodity-based goods rather than complex goods.

Changes in buying behavior cause businesses to adjust prices if they (a) need to incent more sales or (b) need to correct for overages. If a business notices customers aren’t buying as much of a particular product, they will lower the price to move those products off the shelves and make room for more in-demand items.

Product Value

There’s a strong relationship between price and product value. While pricing is a significant factor in customer perception, customers will weigh that price against the benefits and solutions your product delivers.

Products that deliver high value can generally command higher prices. But this only works when the customer perceives the value as worth paying for. If a business can’t convince customers that its product is as valuable as it says, it will have to lower prices to continue targeting that market.

It’s all about finding that sweet spot between getting the most profit and solving a problem that customers think is worth that amount of money to solve.

Competitive Pressures

If one of your direct competitors launches a new product or changes its pricing strategy, you have to ask yourself a few questions:

• Do buyers prefer their pricing or ours?
• How is our product different from theirs?
• Is there anything we can do to signal value beyond pricing alone?

If your product and theirs offer about the same value and buyers seem to respond well to the amount they charge or the pricing model they use, it could be worth raising or lowering your prices to match. In those cases, you’ll probably end up with higher sales numbers as a result.

Strategic Objectives

Depending on your industry and growth stage, you might approach pricing adjustments differently. For example:

• A SaaS startup’s GTM strategy might include penetration pricing to get a foothold in the market.
• A consultant who wants to shift to enterprise clients would raise prices significantly to appear more experienced and credible.
• A retailer that has to clear out old inventory would lower prices to move stock.

The point is, your pricing strategy is fluid and should be based on where you are now and where you want to go. Lowering your prices eats into profit margins and generally attracts lower-value customers. Raising your prices will usually have the opposite effect.

Pricing Adjustment Strategies

Businesses employ a variety of strategies when adjusting their prices. The most common ones are:

• Price increases
• Price decreases
• Maintaining prices
• Dynamic pricing

Let’s dive more into each.

Price Increases

A company may increase its prices to compensate for higher costs, boost profits, or better align with customers’ perceived value.

When businesses raise prices to offset increased costs (like the price of raw materials), they’re making a cost-plus pricing adjustment. The calculation is simple — just add the desired markup to the new cost.

Value-based pricing adjustments are a bit more complicated because they factor in improved features, benefits, and solutions that customers will receive thanks to the price increase. Generally, this involves conducting market research, gathering customer feedback, and analyzing competitors’ prices to justify the increase.

To influence how customers perceive your product, you’ll have to use psychological pricing tactics like charm pricing, price anchoring, and odd-even pricing. You could, for example, raise the current price of a luxury product from $999 to $1,000 to make it appear more expensive and exclusive, even though it’s just a $1 increase.

Price Decreases

Price reductions are commonly used when businesses want to increase sales, clear out inventory, or attract new customers. However, like with price increases, there are various tactics to consider.

If your goal is to promote other, higher-value products, you might choose to become a loss leader. This means you’ll lower prices on certain products to attract customers and encourage them to purchase other items at their regular price.

Limited-time offers, such as seasonal discounts and flash sales, also help move inventory out the door. They create a sense of urgency, since buyers know they’ll only get that deal if they act within that time frame.

Another way to package an offer is with bundle pricing. This strategy involves combining multiple items or services into a package at a discounted price. Customers feel they’re getting more value for their money, which makes them feel compelled to buy. For example, a smartphone, charger, and case could be sold together for a lower price than if each item was purchased separately.

Maintaining Prices

Businesses use several tactics to keep prices consistent over time. The most common ones are:

• Offering more value to customers through free shipping, loyalty programs, or extended warranties.
• Differentiating the product from other similar offerings in the market. This could be by using unique packaging, branding, or features.
• Reducing costs and achieving operational efficiency, so customers don’t have to bear the brunt of an increase in cost.
• Negotiating better deals with suppliers and vendors to keep costs low without sacrificing product quality.
• Implementing a price ceiling where prices of specific products can’t go above a certain amount.

Sometimes, promotional pricing can devalue your product but raising prices would cause sales numbers to drop. If you run a pricing experiment and find that to be the case, it’s best to keep prices the same and find ways to reduce costs or add value to the product.

Dynamic Pricing

Dynamic pricing is a special type of pricing where AI algorithms use real-time data to adjust prices according to market demand, customer behavior, and competitor pricing. It’s effective when a product has low price elasticity and the market is constantly changing.

Major ecommerce retailers are a perfect example of dynamic pricing in action. They use algorithms to track market dynamics and adjust prices accordingly (Amazon, for example, changes its prices every 10 minutes). This allows them to stay competitive while still maintaining margins.

Airline companies also use dynamic pricing by changing ticket prices based on demand and seat availability. For example, a flight during peak holiday season would be more expensive than one during an off-peak period.

Technology for Pricing Adjustments

No matter which price adjustment strategy you use, you need to have the software to support it. Let’s take a look at the tools you’ll need to make pricing decisions and implement them effectively:

Competitive Intelligence Tools

Competitive intelligence (CI) tools can play a crucial role in making informed pricing adjustments by providing insights into market conditions, competitor strategies, and customer preferences.

Examples of CI tools include:

• SimilarWeb
• Sisense
• G2 Crowd
• Semrush
• Crayon
• BuzzSumo
• Wappalyzer

While these don’t touch on pricing specifically, they can show you where to look for information like market data, trends, customer behavior, and buying patterns. When you know which competitors are charging more or less (and how much success they’re having), you can make informed decisions about your own prices.

For price monitoring specifically, you can use a tool like Price2Spy, PriSync, or Dealavo.

Pricing Automation Software

Pricing automation software is advanced software that automates price calculations based on cost changes or rules. You can set these rules yourself or use built-in algorithms to adjust prices automatically.

You’ll use pricing automation software when you want to implement dynamic pricing or use AI to adjust prices. You can also use it to track competitor prices and receive alerts when changes occur.

CPQ (Configure, Price, Quote) Software

CPQ (configure, price, quote) is a tool sales teams use to create quotes and proposals in just a few minutes.

In terms of pricing adjustments, there are a few features that make it an essential resource:

• Integration with your CRM and pricing software so you can use data to create accurate quotes
• Automatic pricing calculations based on pre-configured logic (e.g., “Buy X, get Y at 50% off” or “only allow price decreases up to 20%)
• Advanced pricing rules and discount guidelines to ensure consistent pricing across all sales channels
• Automated bundling and upselling recommendations to increase deal size without decreasing profit margins
• Manual adjustments to line items and overall prices with instant approval routing

For B2B sales teams, CPQ makes pricing more adaptable by allowing them to change prices on the fly based on customer needs and preferences.

Contract Management Software

In the B2B space, contracts will usually include price adjustment clauses that allow for changes based on specific conditions, such as changes in costs or market rates. Contract management software helps businesses track contract performance and make changes to pricing when necessary.

Some features of contract management software that help with pricing adjustments include:

• Automated alerts for upcoming renewal dates and price adjustments
• Real-time data on contract status, including amendments, approvals, and changes
• Version control to track changes and ensure accurate pricing in contracts
• Integration with CPQ and other pricing tools to create updated proposals based on contract changes
• Advanced contract analytics to identify areas for price adjustments and negotiation opportunities

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