Yes, you can raise prices in a recession


During recessionary times, most companies focus on maintaining market share and margins by slashing prices and cutting costs to the bone.  However, this is a shortsighted strategy for all but a few firms.  For one thing, only a small number of categories can support more than one low cost “value” brand.  Moreover, it is extremely difficult for any firm – outside of those with the largest scale economies – to achieve and sustain a leadership cost position.   As a result, competing on price turns into a Faustian bargain: battle it out with other price cutters (who usually have the same access to technology and supply chain) to keep market share while watching your profitability erode. 

Harvard Business School researchers Frank Cespedes, Benson P. Shapiro, and Elliot Ross suggest another approach, Performance Pricing, which offers companies a way to increase profits and maintain if not grow share. Traditionally, most managers set prices according to simple but crude cost-plus or average pricing policies or merely follow competitive moves. PP is a different strategy.  It sets price levels based on the functional and intangible value delivered by the products. PP uses premium pricing as a signal to the consumer of superior product performance, image and value. As such, PP seeks to maximize both the customer benefit and the selling company’s profitability. 

According to the researchers, PP seeks to create the largest possible gap between the total basket of benefits provided to customers and the unit cost, as a function of  the product’s  benefits, brand image and ability to exploit favorable pricing situations (e.g., time sensitive delivery).   Larger value gaps allow the firm to raise prices without compromising their value equation based on the premise that consumers will gladly pay higher prices for receiving more relevant and compelling benefits.

Fundamental to the notion of providing differential value is “framing” the price appropriately by customer need, purchase moment and type of buyer.  Specifically, a product can and usually does have different value depending on the context, thereby supporting different prices for specific transactions. In other words, the product is what the product does at the moment the customer purchases it, not what the industry or organizational culture thinks it is.  PP also has important implications for investment spending.  Capital and marketing investments would flow only into product and service initiatives that consumers value highly and that they are willing to pay higher prices for. 

PP makes no assumptions about standard pricing levels or industry returns on capital.  Performance-priced brands can deliver price premiums across the business cycle even in unattractive or declining markets.  A number of industries have benefited from this approach – also called value-based pricing – including logistics (Fed Ex), cement (Cemex) and truck manufacturing (PACCAR)

The following are key success factors in deploying a PP strategy: 

  1. Dispense with the notion of “fair” prices or industry-driven pricing.  Companies don’t determine what is fair, customers do and their assessment is based on the total value you bring.
  2. PP requires work.  It is not a simple exercise to understand your product’s value or what, how, when and why consumers buy.
  3. Firms must relentlessly communicate and monitor their delivered value to justify premium pricing.
  4. Don’t ignore costs.  Lower costs enable higher profits and help fund value-building activities.
  5. PP is an organization-wide process.  Bring together the “cost counters” like finance and the “value generators” like marketing so they can truly understand both sides of the equation and what the levers are.

 For more information on our services and work, please visit the Quanta Consulting Inc. web site.

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3 comments so far

  1. […] with rapidly increasing input costs) to raise prices in low growth environments. However, managers need to be smart about how and where they do it. Opportunities to increase prices often exist in sleepy or price inelastic product categories where […]

  2. […] With a shared-value approach, the company looks to increase customer value and reduce distrust by redesigning its pricing policies around a customer’s full gamut of needs (versus their own).  For example, managers could engage customers to help create new discount schemes, more flexible ways to purchase a service or lower-risk ways to consume a product. This customer-centric approach will transfer more value to consumers, improve trust in the brand, and drive higher product consumption  (as new users and current customers are attracted to a better value proposition).  In some cases, a shared-value approach can help increase prices. […]

  3. […] With a shared-value approach, the company looks to increase customer value and reduce distrust by redesigning its pricing policies around a customer’s full gamut of needs (versus their own).  For example, managers could engage customers to help create new discount schemes, more flexible ways to purchase a service or lower-risk ways to consume a product. This customer-centric approach will transfer more value to consumers, improve trust in the brand, and drive higher product consumption  (as new users and current customers are attracted to a better value proposition).  In some cases, a shared-value approach can help increase prices. […]


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