Watch Those Price Changes!

There is no doubt that over the next couple of weeks, Leading Companies everywhere are going to be executing price changes. This is a time for Pricing diligence.

Not only will companies be changing their prices for the new financial year, many will seek to pass on the costs associated with the carbon tax, which also commences on the 1^st July.

There are two types of costs associated with making price changes. The first are what’s known as “physical costs”, which are associated with updating customer or consumer –facing prices: those found on store shelves, price lists, rate cards, websites and the like. In 2003, a paper by Mark Bergen, Mark Ritson and others found that “in the retail grocery industry, the cost of changing prices is over $100,000 annually per store”.

But by far, the most expensive cost associated with price changes are the managerial costs associated with working out the magnitude of the price changes, what the new prices will be, and updating the necessary spreadsheets, systems and sales force tools and apps. One price change I devised for a client several years ago cost $285,000 to execute. Fortunately it generated $5.9 million in incremental revenue, so it was well worth the effort.

Given the time, effort and costs associated with changing prices, diligent execution over the coming weeks is essential. The stakes are high and errors can be costly, and history attests to this.

In 2007, United Airlines sold tickets from San Francisco to New Zealand for $1,062. The fare, sales of which were honoured, should have been $10,620 for Business Class. British Airways didn’t honour the 1,200 seats they sold from the USA to India in 2009 for $40. They were trying to increase prices by $40. And in 2005, Expedia advertised rooms at the Hilton Hotels in Tokyo and Osaka for $2 - $4 a night. No wonder one guest booked a one year stay at the Tokyo Hilton.

Over and under pricing probably occurs in equal numbers, but as I’ve mentioned in this column previously, customers aren’t going to tell you about under-pricing. All the more reason for pricing diligence and vigilance over the next couple of weeks.

Do I High-ball or Low-ball my Price?

One of my favourite pricing cartoons is that of a schoolgirl selling lemonade for $500, with the caption reading “I just want to sell one and call it a summer”.

The cartoon epitomises one of the most commonly asked questions in pricing which, on first appearances, could appear to be a rhetorical one: do I price high and come down if I have to, or do I price low and raise prices when demand takes off? Most Leading Companies would adopt the former strategy, but does starting high always make sense?

Starting with a high price is of course the “pricing textbook” answer, and there are a couple legitimate reasons for this. It is always easier to lower the price of lemonade from $500 than it is to try and raise it, and if you want to position yourself at the top end of the lemonade market, that price is going to be an indicator of quality for you.

T-Glass (not their real name) is not a cartoon strip, nor is it selling lemonade. It is an Australian-based beverage company who last week, asked the panel of pricing experts on PricingProphets.com if they should ‘low-ball’ or ‘high-ball’ the launch price of their latest locally-grown beverage. The response from one of the experts was very thought provoking, and not exactly “textbook pricing”.

In the case of this beverage, as with many other products, a launch objective is often to build product trail, penetration, and thus market share. Starting with a high price, which doesn't stick and subsequently has to be lowered, means starting that trial and penetration exercise all over again.

In this situation, starting with a low(er) price may help to achieve that trial, penetration and establish the product in the consumers’ repertoire. That leaves us with the question of how do you raise prices in the future?

In the case of a beverage that is made from seasonal, agricultural products, look no further than the wine industry: let the customer know that this particular harvest or season is exceptionally good, include that message in the pricing communications strategy and price accordingly.

This approach also enables you to avoid hard-to-defend cost-plus –based price increases, and set prices according to the value you deliver.

We’ll check in with the beverage company in a couple of months and see how they’re going.

[This post also appears on LeadingCompany, 7th June 2012]