Sunday, October 24, 2010

Pricing – Emotion versus Promotion

So the Wall Street Journal reported last week that there is pressure among companies and retailers to raise prices due to rising commodity costs. 
The Wall Street Journal stated

“Grocery stores have struggled with price deflation in the last few years and had welcomed signs of food inflation as a means of raising profits by passing along the higher prices to consumers. But with intense competition for customers resulting in fierce discounting battles among stores, inflation isn't as welcome now.”

Why isn’t taking pricing welcome now?  Base prices that rise actually help companies make money and get them growing again.  Think oil companies.  When gasoline prices go up, oil companies maker record profits. Why?  Because the margins are based on a percentage of sales so they go up proportionately with the dollar sale (not the volume).  When raw materials and finished goods costs go up to the retailer, both the manufacturer and the retailer make more money.  Commodity ingredients are going up in price and companies stand to do well to pass along pricing and dare I say even take more. Companies do better, retailers do better.   

Category-wide base price changes don’t necessarily negatively affect volume.  It’s all about elasticity (how much the volume changes with a change in price).  Think cars.  Do car sales go up when prices go down?  Sure, you say, don’t you remember the cash for clunkers program? But wait a minute.   That was a promotional limited time only event.  If all cars went down in price, no more cars would be sold.  Only the promotional offers stand as reason to hurry up because of limited availability.   What retailers should be looking for is increased prices overall but nice incentives of limited duration. 

When consumers are asked how they are stretching their dollars these days, they admit to using coupons and watching for sales.  These are the temporary discounts.  Just like cash for clunkers, temporary mortgage incentives for first time buyers, a big sale at the mass merchandiser. 

Some, folks will switch out to private labels and generics if you put them right next to a name brand, but that is really the call of the retailer to trade down.   It’s not about base prices.  In most cases, they don’t change volume in categories from steel, cars, oil to diapers.  Its only promotional

It might be counter intuitive, but we shouldn’t fear prices going up.   It might just save your business.  And keep a few more folks employed.

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