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How
to Raise and Lower Your Prices
The
decision to raise or lower prices is a tough one, with many ramifications
for your business. But the decision whether or not to change prices is not
as important as the decision about how to accomplish the change. To put it
another way, two companies who change prices on the same products by the
same amount may get widely different results depending on how they implement
the new policy.
Raising
and lowering prices effectively involves careful attention to timing. It
requires knowing how to affect your customers' perception of the value
inherent in what you are selling. It forces you to study and accurately
predict reactions from your competitors.
Deciding
How Much to Change Prices
Sometimes businesses announce major price hikes, even doubling their
previous rates. One theory is that a single large price hike will get the
pain over with. Businesses may also announce large price hikes when they've
experienced major increases in the price of a key ingredient or cost
component. A company that is being overwhelmed by sales volume from an
unexpectedly popular product may jack up prices to reduce demand to a
manageable level.
However,
most price hikes are done in stages on the theory that customers will be
accustomed to higher prices over time and be willing to tolerate them as
they become more loyal. A series of smaller hikes may not even be noticed by
customers who would be seriously put off by a single large one.
If
you have more than one product, consider raising prices on some items while
leaving the others the same, or even lowering them. Some customers are
sensitive to the slightest price hikes for a particular item while mostly
ignoring other increases. Automobile dealers use this fact to their
advantage by cutting prices on cars as low as possible and attempting to
make much of their profit on accessories like fancy paint jobs, about which
customers are less price-sensitive.
Picking
the Right Time
If you decide to raise or lower prices, you must pick the right time. If
you're lowering prices, choose a time when the change will have the most
impact; if you're raising prices, choose a time when you'll encounter the
least resistance. Your business's seasonality, growth stage and sales cycle
affect your choice.
Many
retailers, for example, raise prices seasonally, usually in the fall when
Christmas is near and rushed shoppers pay less heed to prices. A brand-new
store early in its growth stage might delay a price hike, however, in a bid
to gain market share. Meanwhile, a computer store catering to businesses is
likely to ignore the holidays and time prices changes to coincide with new
model introductions, which are more important to its sales cycle.
It
may be tempting to put off raising prices until after a busy season ends.
After all, higher volume may make up for lower per-unit revenues. Gouging
should never be a part of your price-raising strategy. But the time to raise
prices is when your product or service is in demand.
Changing
Value and Price
Prices don't exist in a vacuum. Like the earth under your feet, a price is
supported by the value the customer perceives in the product or service to
which the price is attached. Thinking about price and value in this way
makes it clear that this is at least a two-dimensional problem. That is, you
can change the pricing and leave the value alone, or you can change the
value and leave the pricing alone. You can also change both value and
pricing or leave them both alone. Any one of these changes can be tailored
to have the same impact on your bottom line, at least on an individual unit
basis, but they may have vastly different effects as perceived by customers.
An
example of changing the price without changing the value is when a grocery
store holds a sale on a popular consumer item. A case of Coca-Cola is a
well-recognized commodity; shoppers have a firm idea of what a dozen cans of
Coke are worth. If a retailer charges less than that amount, shoppers will
be attracted. Charge more and shoppers will be repelled, all other things
being equal.
Many
businesses change value without changing price. For instance, cans of ground
coffee have slowly shrunk from 1 pound to around 13 ounces. This has allowed
coffee makers to maintain the perception of holding prices steady or even
reducing them, while they are in reality increasing the per-ounce charge for
ground coffee. Shoppers who notice such shenanigans may resent them. But if
a competitor makes a value change, many companies feel they have to follow
suit or be perceived as high in cost.
You
can complicate the picture by changing both value and price simultaneously.
For instance, a grocer could raise prices on Cokes but include a free
insulated can holder with every purchase of two or more cases. Changing
value and price simultaneously may confuse customers, so it's a good idea to
figure out which element is most important—the value of the can holder or
the extra prices on Cokes, to continue the example—and stress that in
promoting the offering to the marketplace.
Many
businesses get the best long-term results from increasing price and value.
Others find that they can cut their own costs while increasing value and
thereby offer an almost irresistible proposition to customers—a powerful
recipe for growth, indeed. But the key lesson about value and price is that
these elements can be adjusted to move demand and increase sales without
changing what it actually costs you to make a product. Careful attention to
what happens when you move pricing and value points can show you the way to
pain-free, profitable growth.
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