Growth and increased revenues are things that all businesses are after. Sometimes, however, companies see their revenues hit a peak and their growth stopping. That’s when the incumbent value comes into play.
When companies stop seeing increased revenues, they must start assessing the value of their current customer relationships and their incumbent value. By doing so, they can raise their pricing to create incremental pricing revenues.
Whether raising the prices is a good or bad decision depends on multiple factors. Some of these factors are how the customers engage with the company and react to rising prices, as well the company’s current incumbent value.
By analyzing how your customer base perceives your incumbent value, you’ll be able to tell whether maintaining the current prices or raising them is a better choice for your company’s long-term profitability.
To better understand your company’s incumbent value, there are some considerations that you need to keep in mind when doing your assessment.
Understanding incumbent value is essential for improving a company’s bottom line. If measured accurately, it can be converted to incremental pricing revenues and improve a company’s bottom line.
Whether you’re assessing the incumbent value for average consumers or for a single, large client, the following points must be taken into consideration.
The nature of your incumbent value
Having an incumbent advantage in a market is something that takes lots of work. To make the most out of it, you must understand the nature of your company’s current incumbent position.
In some cases, a company might have an incumbent advantage in the market since their products are highly innovative. Competitors just can’t keep up with what they offer so the market perceives them as innovators.
If that’s the case with your company, raising the prices is something that your customer base will probably accept. After doing the proper market research to find out how much exactly can you raise your prices, you can do this without having a big backlash from the customers.
A good example for a company with a similar incumbent advantage is Apple. Due to the way in which they are perceived by their customers, they can raise their prices to increase their profits.
In other cases, the incumbent value of a company is based solely on its prices. If your company’s business model is based on selling large quantities of a product at a cheap price, increasing the prices isn’t usually a smart move.
By increasing your prices, you’ll lose your competitive advantage that earned you that incumbent advantage in the first price and will risk losing that market position to another company. In this case, increasing your profits might be achieved by lowering your prices, not increasing them.
By doing so, you’ll company will be able to maintain its incumbent advantage by making it difficult for new market entrants to compete and create incremental pricing revenue by selling more of your products.
Previous market reactions
In most cases, what your company is trying to do has been done before. Whether it was done by your company in the past or done by one of your competitors, learning from these lessons can save your business lots of money.
How do customers react to increasing prices in you market? Did lowering prices help businesses sell more products? Sometimes, what you’re trying to do has been attempted multiple times already.
Analyzing these attempts and the market reactions they got can help you do things in a better way or avoid something that’s destined to fail in the first place. It’s also a good thing to invest in analyzing the incumbent advantage that your business has instead of depending on mere assumptions.
Incumbent Value: Advantages and Disadvantages
Having a high incumbent value has its advantages and disadvantages. The following are the key upsides and downsides of having such a strong market position.
Advantage: Incremental Revenue Opportunities
Having a high incumbent value can create an incremental revenue opportunity for your business. Being in such a strong market position make selling more of your products easier and allows your business to expand in ways that are just impossible for other businesses.
Disadvantage: Defending your Incumbent Position
Having an incumbent advantage in a market is difficult. What’s more difficult, however, is keeping that advantage. When you’re in such a strong market position, there will be many companies trying to take your place.
To preserve what you already have, you need to invest in things like R&D as well as improving your production methods. If you don’t do that, you’ll soon find another company taking your place.
How can Sniffie help?
Properly assessing the incumbent value of a business requires calculating many variables. Understanding how your customers engage with your company, how your customers react to pricing changes as well as well as knowing the prices of your competitors will help you make sound business decisions.
How to use incumbent value
- Calculate the incumbent value of your business.
- Figure out how much can you raise your prices.
- Analyze the effect of raising the prices on your relationship with your customers.
- Analyze the effect of raising your prices on the bottom line of your business.
- If the outcome is positive, move on with raising your prices.
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- Make sure not to overestimate the incumbent value of your business.
- Do your research about the effect of raising the prices before you go through with it.
- Assess the impact of raising prices on all your customer segments to make sure it’s in your company’s best interest.