When Raising Prices Can Increase Profitability and Service Despite Lower Volume

Price cutting has likely been debated more vigorously within corporations over the past two years than in the last decade. It's a tried, though not always true, strategy proposition to retain or gain market share in an increasingly cost conscious marketplace. But what if you could increase pricing and profitability with lower volume? As companies strive for full utilization of fixed resources and remain recalcitrant about re-hiring, this counter intuitive strategy just might make sense for many.

In this week's WSJ, Frank V. Cespedes, Senior Lecturer at Harvard Business School, Elliot B. Ross, Chief Executive of MFL Group, and Benson P. Shapiro, Malcolm P. McNair Professor of Marketing emeritus at Harvard Business School collaborated on a convincing argument "for companies that can and should compete on the basis of performance, for which their customers willingly pay higher prices." The authors contend that "By competing on performance instead of price, you shift the battle to where your company's strengths lie -- in the ability to deliver unique benefits. So-called performance pricers are adept at three core activities: identifying where they can do a superior job of meeting customers' needs and preferences; shaping their products and their business to dominate these segments; and managing cost and price in those areas to maximize profits."

A four step process that includes case study examples (no surprise here from HBS) is used to explain the process: "Identify Value Opportunities, Set Priorities, Align Price and Value and Get Cooperation." The step to align price and value is in part, at first glance, as counter intuitive as the base proposition. It states "The key here is being able to document and quantify the precise nature of the benefits that your products offer, and to figure out what their tangible value is to the customer, in terms of acquisition cost, operating cost and added value to the end user. Once the supporting data are in hand, then you sit down with the customer to discuss what the new price should be [emphasis added]. Getting cooperation "relies on a lot of help from the customer, and getting that cooperation takes work ... [but] After such increases are won, continuing efforts to communicate why higher prices are justified can bring other benefits as well" as indicated in the case study.

Most importantly "despite lower volume, the [case study]company's return on sales increased by more than 40% due to its ability to identify value opportunities, prioritize requirements, align value and price, and communicate value to cost-conscious customers." This article is a 'must read' for vendors and practitioners who value transparency and eschew the commoditizing of both product and services spend.

William Busch

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