Raise Prices? Are You Nuts?

Maybe I am, but when the significant cost-cutting opportunities that companies have focused on since the Great Recession began are exhausted, shouldn’t company executives give it serious consideration?  Increased prices translate into increased gross and net profits.

There are essentially five ways to increase revenue:

  • Sell more volume to current customers
  • Add new customers
  • Add new products or services
  • Acquire competitors or complementary businesses
  • Raise prices

Company executives expend much time and effort on the first four but are often blind to the last option; they presume that raising prices can’t be done in today’s economy.  And yet raising prices may yield more to the bottom line than other approaches.

That’s not to say there isn’t risk in raising prices.  Competitors could maintain their prices and take customer business away.  There could be backlash from customers; their purchases could decrease or end as they re-evaluate their relationship with a supplier who’s increased prices.

It’s been 6 years during which many industries have been unable to pass along cost increases in commodities and other costs to consumers.  When a company takes the lead in increasing prices, it’s not unlikely that competitors will follow suit quickly and raise prices to restore shrinking margins.

Done poorly, a price increase will cost a company customers and revenue.  However, a well-designed price increase may actually help a company to “fire” unprofitable customers, those requiring high attention and service but resisting paying for it.  Should the latter customer class stay, its profitability increases; if not, a company may realize profit “addition by subtraction.”

Effectively instituting a price increase requires planning an appropriate strategy to minimize customer backlash and sustain the increase.  Some of the key elements of a strategy may include:

  • Reallocation of working dollars from advertising to promotion to build market share
  • Running trade loading programs which are succeeded by introducing “new & improved” products at higher price points (alternatively, reducing package size and maintaining pricing)
  • Avoiding trade alienation
  • Navigating  law and regulation (e.g., Robinson-Patman Act) on pricing that inhibits differential pricing
  • Designing a marketing campaign to effectively communicate the higher value of a company’s products and/or services compared to competitors, be it in quality, service, warranty or otherwise.

In subsequent posts, my partner Cal Calligaro and I will examine these components and critical aspects of designing a strategy that addresses these concerns.

It’s not a simple decision, but maybe it’s not so nutty, either.

About Ken Drossman

Ken Drossman is a Managing Director at Oak & Apple Partners, LLC. Ken has spent more than 35 years demonstrating practical financial acumen by leading, advising and guiding privately-owned, small and middle-market companies through financial and operating challenges. He has in-depth experience in all phases of financial, strategic and operating management from hands on cash flow budgeting through acquisition financing, from divestiture of business units to reorganizing and leading newly formed companies. Prior to co-founding Oak & Apple Partners, Ken has been the principal at Lakeview Business Consulting, LLC, which assists entrepreneurial business owners and their companies in achieving their business vision. Ken earned both his undergraduate and graduate degrees from The Wharton School of the University of Pennsylvania. Before founding Lakeview Business Consulting in 2006, he served for 18 years as CEO, COO and/or CFO at several privately-owned companies, in industries including financial services for hospitals; digital document storage and outsourced back-office services for professional service firms; design and distribution of personal business accessories through big-box retailers; capital goods manufacturing for national and regional retail chains; and information services for beverage alcohol manufacturing and marketing companies. Previously, Ken was a Partner at Grant Thornton, LLP, where he provided management consulting services to such companies as AT&T, Baxter Laboratories and GTE-Sylvania, as well as many middle-market companies.
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