How Companies Can Get Smart About Raising Prices

This is the title of a big article that appeared in the corporate finance section of the Wall Street Journal and, in our view, is about 80% right. The authors are two academic professors, Aliwada and Farris, from Tuck and Darden, two otherwise good business schools.

However, to start with, the article¬†doesn’t mention b2b companies, which comprise 30% of the economy, preferring to concentrate on the 70% that are retailers.

The other starting problem with the article is that it appears to assume that you and your company have great knowledge of your market position and your competitors. Most smaller companies know their competitors, but haven’t a clue about their market position. Why positioning is important will come out. Here are the Journal tenets:

1. The Big Mistake: Slashing Promotions. We argree in times of slow growth this is a mistake, but one should intensify efforts to figure out which promotions are effective and do more of the best.

2. Cutting Quality Can Backfire. You bet. In fact, it usually doesn’t cost much to increase quality (we’l leave it up to you to figure out what your quality measures are), and less than revenue increases, so there’s a positive net effect on the bottom line. Again, you have to know how your quality stacks up against your competition to make this argument. The authors also argue against cutting amounts in the packages, which amounts to a price increase. We see lots of this done, so we’d like some empirical data, please.

3. Wait for an Opening. It’s better to raise prices when introducting a new or improved product, whose costs might not be much more than the old product. Your position in the market is important, because if you’re a follower and you raise first, you might get kneecapped. Look at the airlines.

4. Keep the Deals Coming. This is sort of like keeping promotional costs up, but price increases can be disguised by promotional deals, such as bundling. Only a portion of most markets, business and consumer, is price sensitive.

5. Give them good, better and best. Think gasoline grades. There’s not much cost diference between 87 and 91 octane, but there’s 20-30 cents difference at retail. Could you do this? This strategy does apply to consumer and b2b products.

6. Make products LOOK more valuable. Change the packaging, after doing a little market research on focus groups. This could tie into item (5) above.

7. Raise Prices the Right Way. Spell out for customers why you’re raising prices, in terms they can understand (and your customers are smarter than you think they are) and don’t go out and buy a new corporate jet the month after. Looks bad. Spell out which raw materials went up. You can’t use Obamacare yet, because it hasn’t hurt you much, aside from some provisions, such as coverage of pre-existing conditions, washing through your insurance policy.

So, if you want to read the WSJ article, we imagine you can find it at wsj.com.

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