We are seeing more and more evidence that prices are increasing in a number of markets, so if you are refining your pricing strategies and plans for 2015, be bold. Don’t wait until everyone else has raised their prices. Be confident and take the lead in raising your prices. Most markets appear ready for it.
There was an article in the USA Today last week, Pay up! The companies charging you more. The article cited companies like Chipotle, Philip Morris International and Allergan among several others which are all raising their prices. One of the important points in the article was the strong positive reaction from investors to companies who had raised prices. Of course the investor reaction should not surprise anyone. We have written in the past about the profit improvement power of 1%. A 1% increase in prices typically increases Operating Income by 10% to 20%, whereas a cost reduction typically improves Operating Income by 2% – 7%, depending on the industry. Price is more impactful.
Earlier this summer I tweeted about planned price hikes by Netflix, Hershey, UPS and Fedex, broad price increases in the beer industry, and restaurants with increased wine prices. If you follow our monthly newsletter, Pricing Insights, we have also pointed out that inflation is ticking up slightly. Add to that continued reports that unemployment has decreased to its lowest level in years and job growth has picked up. All of these are evidence that your costs will be increasing and your customers will see cost hikes in other areas, so they will not be shocked by your prices increasing.
If you are reading this and thinking “I will lose customers if I raise my prices,” think again. If that were true, why aren’t 3M, Kimberly Clark, and Sigma-Aldrich losing market share after raising prices? The answer is because their customers care most about the quality of their products and services, and the ability of their providers to meet their specific needs. Price is important, but the customers can tolerate moderate price increases, and as they see increases in other parts of their business and begin to raise their own prices, they can manage it.
Conversely, if your pricing strategy is to be the low-price provider, perhaps you think you can pick up more business by holding your prices while your competitors raise their own. Unless you have a defendable long-term cost advantage versus your competitors, that is a very dangerous game. You may pick up some short-term business, but competitors will not let that stay for long. Even Walmart, the low-cost retail chain recently learned that competitors can and will use your low-price strategy against you, Volatile Brew: Price Matching and Social Media.
Each and every day, as leaders and shareholders of your respective companies, you get up thinking “How can we add value to our customers?” You earn your customers’ business by solving their problems and providing the products and services they need. When you do that consistently, you are adding customer value and your customers like doing business with you. It is important to turn that customer value into shareholder value by charging the appropriate price. Don’t be timid. Now is the time to have strength in your convictions.