Increasing Prices & Avoiding Price Walls
Atenga’s CEO, Per Sjofers interviewed by Cheri Hill, CEO of Sage International Inc.
Most companies have great fear of raising their prices. How do you really help people understand the importance of a pricing project within their organization and of course your 6 steps and the methodical way you go through it? And how often should companies be raising their prices?
The general rule is that you should make small price changes frequently. The reason is that, let's say you increase your prices a couple percent every 6 months. That isn’t so much, but after a couple of years that makes a big difference. This also prevents being in the situation where suddenly your back is against the wall and you realize you can’t go on anymore because your costs have increased. Then you have to implement a substantial price increase. Which is possible to do if you present it in the right way, but it is much easier to nudge up your prices every 6 months or maybe even every 2-3 months - it really depends on the circumstance.
I have a great example, UPS, every year raises their prices across the board 2-3%, consistently and you attribute it to price of gas and all that. Well for the last year or so, gas prices were low - and when the price increase showed up in January, it really made me question, do they have a pricing strategy? Or is it just across the board, because we know they aren't paying more in gas. So it forced me to go out and look at other options...
First of all, the airlines are in the same boat. The whole airline industry is an interesting case study because they almost disappeared as an industry 5-6 years ago. What they started to do was simply cut supplies which demanded higher prices. Which is why the airline industry now has load factors which are close to 90%. This is great for them and not so great for Travelers like us, but it also made the airline industry more profitable in the last 3 years or so. It is also interesting what you are saying about UPS because their has to be some intelligence behind it. If you use gas prices as a reason for increasing prices, and then gas prices decrease, you have people like yourself questioning the same thing. They go out and start looking for alternatives. Now, there's something else that is very important as you go up in pricing, thanks to the psychology of pricing, their is something that we call price walls.
Price walls are price points where a small price change can make a very large difference in your sales volume. If you priced yourself to low, which many do, you come to one these price walls and inch up your pricing and see your sales level explode. This is because suddenly you are getting closer to the that point where your price is aligned with your customers willingness to pay.
On the other hand if you price yourself on the high side, you come to a price wall where if you raise your price, you see your sales level drop substantially. We have seen occasions where companies have gone from pricing their product from $499 to $500 and have lost 2/3 ‘s of their customers. So knowing where these walls are incredibly important and you can't guess them. They have to be measured and that is what we do in pricing research, we measure where these walls are.