Earlier this month, Hertz announced they would be raising the price of most on-airport car rentals by $5 per day, Hertz to Raise Car-Rental Rates. There is some risk to Hertz, because the rental car market is already quite competitive, and new options from Lyft and Uber add to the competition. However, I view it as a good move, demonstrating price leadership. In all markets, someone has to lead. In healthy markets with rational competitors, that leadership often benefits all competitors.
All companies would prefer to sell at higher prices. Even companies who compete on the basis of offering the lowest prices would prefer their lowest prices in the market to be higher. Similarly those who try to stimulate higher demand and lower their production costs by offering lower prices would prefer that those market-clearing prices be higher. The reason is they make more money. And the more money they make, the more they can invest in R&D, additional capacity, or other profitable alternatives. Despite that overwhelming preference for higher prices, market participants are often fearful of raising prices. The fear is that demand will go down, or a competitor will take business away because of the price differences. That cognitive dissonance can paralyze market participants so nobody acts.
Price leadership can come in a few forms, but most often that leadership is found in being the first to change prices. Often, as is the case with Hertz, the largest player in the market ends up being the price leader, but it does not have to be that way. The largest players are not immune to the fear that changing prices could cost them volume. But, someone has to lead.
The way to lead the market is by being purposeful, understanding the value brought to consumers, taking logical incremental steps, and monitoring the results. Much like Hertz, the aspiring price leader should publicly announce their intended price increases and the rationale for them. That announcement lets customers know what is coming, and communicates the value story to customers. Equally important, it signals competitors. Rational competitors who also desire and would benefit from higher prices should follow suit. If the competitors view the increases as a chance to take more market share by maintaining or even lowering their own prices, the aspiring price leader can reverse their own increases.
It is important to also measure the results of price changes. The fear of losing business does not go away easily, and price changes are inevitably accompanied by anecdotes of angry customers defecting to competitors. Rigorous, detailed analysis of how all customer segments reacted and how competitors reacted to price changes enable the price leader to move beyond one-off stories to real evidence of success or failure. If in fact volume and profits decreased in multiple segments and sizes of customers, the price changes can be reversed. On the other hand, if competitors follow suit and customers continue to buy, all the market participants improve their profits and their abilities to invest in new capabilities. Of course the probability of success is higher when the price increases are somewhat modest and the rationale for the changes is logical.
At a former employer, we often heard the mantra, “If it is to be, it is up to me.” The point being, don’t sit around hoping for change, lead the change. Leading change does not mean taking the safe route to ensure you never fail. Calculated risks must be taken. So understand how you deliver value to your customers, be purposeful, make logical incremental price changes and adjust as necessary. Remember, someone has to lead –why not you?
Trackbacks & Pingbacks
[…] Someone Has To Lead | Strategic Pricing Solutions. […]
Leave a Reply
Want to join the discussion?Feel free to contribute!