Pricing Changes: The good, the bad, the ugly

By Moira McCormick on March 9, 2016

Pricing matters - it's one of the classic “4 Ps” of marketing (product, price, place, promotion). It will be a key element of every B2C and B2B strategic plans. A case in point would be Bryant Homes Pricing Strategy. They operate in a highly competitive market but Bryant is able to price its products in the premium range because it offers some of the very best homes (product), in attractive and sought after locations (place) and its promotional literature reflects an upmarket image.

Customers, buyers, distributors, competitors, and economic forces can prevent a firm from implementing prices changes and making them stick. Customers often want a lower price. Distributors want to make last minute price deals. Competitors want to gain market share.

Changing economic conditions often force changes without any warning. What can a company do to counter these external price changing forces? How can a company avoid price wars in the market place? How can a company prevent loss of market share?

A 1% price increase typically delivers an 11% impact on profit. So, in a volatile and competitive market, it is more important than ever to give pricing the attention and focus it deserves. It's never an easy decision to raise or lower prices. Any change could have major ramifications for your business. However, the decision whether or not to change prices is not as important as the decision about how to implement the new prices.

There are many factors to consider when making price changes for both short and long term. Your pricing policy needs to:

  • Reflect the value you provide versus the competition

  • Match what the market will truly pay for your product or service

  • Support your brand

  • Enable you to reach your revenue and market share goals

  • Maximize your profits

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Before you begin

It’s best to look again at your positioning, your brand strategy, and identify your distribution channels before you make any changes to your prices. By doing so, you’ll ensure that your pricing reflects your value and reinforces your brand.

As an example, if your method for delivering value is product leadership, you shouldn’t discount heavily or compete on price; you should also minimize pricing conflicts with any channel partners.

Remember that your pricing influences how the market perceives your product or service. If you’re perceived as a commodity, you must either change the market’s perception via a new positioning strategy, or compete on price and focus on innovating to keep costs low so you can still make a profit.

Raising or 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.

 

Determine Price Sensitivity

A higher price typically means lower volume. Yet you may generate more total revenue and/or profit with fewer units at the higher price; it depends on how sensitive your customers are to price fluctuations. If they’re extremely sensitive, you may be better off at a much lower price with substantially greater volume.

Estimate how sensitive your customers are to fluctuations – it will help you determine the right price and volume combination. More importantly, you can estimate how a price change will impact your revenue. Some customers are sensitive to the slightest price hikes for a particular item while calmly ignoring other increases. Car 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 about which customers are less price-sensitive.

 

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What Price Changes Should I Make?

How about doubling your current prices? Sounds risky I know but one theory is that a single large price rise will get the pain over with in one go. If you've experienced a large increase in your costs from a supplier or your fixed costs have suddenly grown, then you might feel obliged to impose a larger price increase onto your customers than you would ordinarily feel comfortable about. If you have more than one product, consider raising prices on some items while leaving the others the same, or even lowering them.

In July 2011 Netflix CEO Reed Hastings took a series of wrong turns on pricicing that angered customers and nearly derailed his company. He decided to do away with a popular subscription that offered access to DVD rentals as well as unlimited on-demand. Streaming would be separated and each would cost subscribers $7.99 a month, or $15.98 for both – a 60% hike. The company lost 800,00 subscribers, its stock price dropped 77% in four months – and the management's reputation was on the floor.

Optimising prices does not always come down to simply increasing or reducing prices. Often changes in product/service features, the marketing strategy or channel focus is the main way of improving performance, such as low cost airlines pricing luggage separately from the cost of the fare.

 

Timing is Everything

Most price increases (but not all) 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 one huge price rise. 

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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.

Starbucks decided to raise its drink prices by as much as 8% in 2009 – during a period of recession. It made sense for them to charge more for their drinks because the customers that stayed with them preferred their products to what the competition was offering – they were less price sensitive. For Starbucks it made sense for them to charge more as long as the loss in profit from a further drop in customers was less than the increase in profit from a higher price.

On the oher hand, a brand-new shop, early in its growth stage, might delay a price hike in a bid to gain market share.

Many retailers raise prices seasonally, particularly near to Christmas when rushed shoppers pay less heed to prices. Alternatively, it may be tempting to put off raising prices until after a busy season ends – you'll be selling higher volume which makes up for lower per-unit revenue. If you are selling B2B time of year may not have any influence at all on the purchase – the sale will depend purely on need.

Price gouging has a very negative (ugly) reputation – it's the act of retailers increasing prices for goods, services or commodities when no alternative is available – highlighted on news channels after a natural disaster. It is considered exploitative, potentially to an unethical extent and should never be part of your price raising strategy.

 

Changing Value and Price

Analyse a wide variety of direct and indirect competitors to gauge where your price falls. If your value proposition is speedy delivery, evaluate your competitors on a regular basis to ensure that you continue to be competitive in that area.

A price is supported by the value the customer perceives in the product or service to which you have attached a price. 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 supermarket holds a sale on a popular consumer item. Four tins of Heinz Baked Beans is a well-recognized commodity; shoppers have a firm idea of their worth. If a retailer charges less than that amount, shoppers will be attracted. Charge more and shoppers will go elsewhere.

Many businesses change value without changing price. For instance, jars 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. Canny customers will notice the difference in weight but if a competitor makes a value change, many companies feel they have to follow suit or be perceived as too expensive.

Many businesses get the best long-term results from increasing both 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.

The deeper the businesses' understanding of what its customers value, the greater the opportunity to optimise pricing. The most advanced companies now use behavioural insights to drive a more sophisticated understanding of customers' response to price and can therefore improve pricing dynamically over time.

 

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Conclusion

Very few companies 'strongly' adopt one pricing strategy or another. Most look to match competitors' prices, whilst some price the benefits to the customer. Analysis suggests that the more frequently that companies can, or do make adjustments to prices, then the greater the impact will be of any pricing decisions. Looking at pricing in a structured, analytical way simplifies a complex subject and reveals opportunities for improvement.

 

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