When Prices Go Up…

To adjust with the rising costs of doing business, entrepreneurs will have to face the responsibility of increasing pricing on their products or services.

I am always surprised how some people in business raise their prices without checking with the marketplace especially the prospects and competitors.

I wrote a while ago that pricing should be a marketing decision and not an accounting or financial one. While the accountants and finance people have the numbers to support their recommendations, they forget one simple but important fact: it’s really up to the consumer!

Scenario one: If a company decides to raise its prices and the other industry participants decide to follow suit then it’s all good in the hood. The airline industry is one example. Not only are the airline companies increasing their fares to keep up with the price of oil but they are now charging a premium for some services such as checked luggage.

In this instance, everybody is increasing their prices so the consumer cannot shop on prices. It’s important to note that if all industry participants carry on with their pricing hikes the whole industry may suffer as people may stop traveling or choose other methods of transportation. But that’s another article.

A second scenario is when a company increases its prices and competitors do not. That spells trouble, as shoppers will stick to the low prices. Like I wrote, that’s why for instance discount outlets are going to do well in a recession.

If an entrepreneur finds himself or herself in such a situation, he or she has two choices:

1) Find ways to decrease his or her pricing by lowering costs. But! The reduced costs should not compromise the quality of the product or service otherwise his or her company’s future is on the line

2) Justify the price hike. The message must make sense to the prospects of course otherwise they will go see elsewhere. Justifications methods can superior branding, be added services, a lifetime guarantee, extra incentives and so forth. One entrepreneur I know increased her prices and offered extra coupons from related businesses that benefited from the referrals.

The third scenario is when everyone raises their prices and a company does not. While it may sound like a winning business move initially, it may backfire if not justified. After all, when Southwest Airlines keeps their prices low, customers are left wondering whether the company makes compromises at travelers’ safety.

Of course, Southwest provides several justifications and one of them is fuel hedging.

What’s an entrepreneur to do when faced with one (or more!) of the three scenarios discussed?

1) Hit the history books. 2) Choose your approach 3) Act first and furiously

Details will be discussed in another article.