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Recession Madness? The Case for Raising Prices

Isn't the key to pricing in a recession to go as low as you can go?

Not really. Look, the low-price leaders claim that title for a reason. They've built their whole operation to wring out costs at every turn--efficiency is in their DNA.

Most retailers don't have the skills, stamina or business plan to sustain a low price strategy, and can get severely burned if they try.

As Harvard Business School professor Frank Cespedes told me in a recent interview:

"Most industries typically allow few firms to build a sustainable, low-cost business model, and once established, the very success of those low-cost competitors makes it difficult for others to duplicate."
In fact, Cespedes, working with HBS colleague Benson Shapiro and Elliot B. Ross of the MFL Group, argue that you can even raise prices in this dicey economic environment if you can make a value argument supporting the move.

They call this "performance pricing" and the idea is to move price setting from a tactical level ("If we lower the price of our Winky Widget by 5%, how many more sales can we make?") to a strategic level involving multiple parts of the organization. Pricing is now based on value delivered to and perceived by the customer.

Here's an example of what they are talking about.

The many of us who set single, or average, prices for our products or services ignore the relative value that different customers derive. In its early days UPS charged a basic delivery price for most customers, whether commercial or residential. But then along came FedEx, which charged a number of rates depending on whether customers wanted same day, overnight or three-day delivery, as well as other parameters such as document versus parcel.

The result: FedEx became the fastest company to reach $1 billion in sales, according to the researchers.

"An average price almost certainly means that some customers are, in effect, subsidizing others. Sooner or later, your competitors will tell them," says Cespedes.
Another example cited by the researchers is PACCAR, the maker of Kenworth and Peterbilt trucks. It has commanded premium prices for 70 years in a largely commodity business by relentlessly communicating value (the trucks save gas and cost less to operate over time).

Yes, price does matter when times are tight. And you likely are going to have to take some bottom line hits to remain competitive. But the message here is don't be so quick to be a price slasher. Use your customer data to peer into your market segments and "seek out the differences and opportunities often hidden in current pieces of business," says Ross.

You can get more detail in Yes, You Can Raise Prices in a Downturn, on HBS Working Knowledge.

How has your pricing strategy changed during the downturn? Do you see an opportunity to "performance price" based on value delivered to your customers?

(Price slasher image by Joe, CC 2.0)

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