How Retailers Can Avoid The Pitfalls Of Raising Prices

In a recent article in the Wall Street Journal.com "How Companies Can Get Smart About Raising Prices," Kusum L. Ailawadi, professor of marketing at Dartmouth's Tuck School of Business; and Dr. Paul W. Farris, professor of business administration at the Darden School of Business, University of Virginia, address many points about the retail pricing strategy of raising prices -- and, if raising prices, how to do it right.  I'd like to revisit some of our previous blog posts that highlight the positives and pitfalls of raising prices right.  Here are some of the points in the WSJ article in relation to our writings... 

1. Keep quality on your main brand the same, but introduce a lower-priced, lower-quality version (called a fighter brand).  Think Apple's new budget IPhone or premium coffee vs regular-blend or economy-blend coffee; or Charmin or Bounty quality paper products, which now have a "Basic" (lesser quality) version.

Pitfall: People may just buy the cheap brand instead, so sales of the regular brand will end up suffering.

Pitfall: If retailer doesn't make it clear that the fighter brand is a budget offering that doesn't have the same quality as the main brand, people may buy the cheaper version, be disappointed, and turn away from the whole product line.

2. Repackage Your Products In Different Quantities:

Option A. Put less product in the older, similar-looking package and charge the old price.

Option B: Put less in a similar-looking package and charge more.

Option C: Position small packs as a virtue and charge a premium for them. Think personal packages like 100-calorie Oreos; or Marlboro Shorts, for instance.

Pitfall: People who feel that they're being cheated or tricked can be very angry customers, abandon shopping with you, and let others know through social media, etc. 

3. Save costs (and don't raise prices) by pulling back on coupons, special offers and other deals.

Pitfall: Not so fast! Research shows that shoppers put much more weight on coupons, markdowns and other offers than most companies realize. (Posts on online retail pricing competition).  

Pitfall: Remember that there's also an important psychological component to promotions. (ask JCPenney), People like to play the game. People like to feel they are smart —and smart shoppers are happy shoppers. (8 Retail Pricing Strategies To Satisfy Shopper Needs For Thrill Of The Hunt).

Pitfall: People have a very strong perception of whether something is a good value. And they base this judgment on how often a brand or store offers markdowns, promotions and coupons. (Some Effective Merchandising Techniques Online Retailers Can Borrow From In-Store Retailers). 

Suggestion: Offer coupons carefully -- Study data collected at checkout to target deals and decide who should get what promotions (e.g. loyalty, buying history, sensitivity to price). (How Retailers Get You To Buy: Pricing & Product Strategies). 

4. Give Customers A Choice Of Good, Better or Best.

We've talked several times on the subject of "Goldilocks Pricing". When you give a choice, customers feel that they have power in the decision; and some customers may trade up to a more expensive version because of context. (Why “Goldilocks Pricing” Is Perfect Competitive Pricing Ploy: Provides Customer Choice & Retailer Profit). 

5. Increase Prices On Discretionary Products.

As opposed to necessities or staples, people tend to be less price-sensitive when they buy discretionary indulgences like cookies, ice cream and cosmetics. 

6. Package and Market To Create Association With Value:

A company making skin-care and beauty products can put together a "home spa package" -- to evoke the feeling of a spa experience -- and sell it at a premium. Consider bundling in general. (10 Ways Retailers Can Leverage Bundling Of Products To Drive Sales.)  

What else to consider if you want to raise prices right:

Timing: It's better to raise prices when introducing a new product, because new products are usually considered improvements, and new features can justify new prices.

Competitive Pricing:  Always keep a close eye on what the competition is doing in general, and with their pricing and product assortment, in particular.  

Explain price raise to customers: Spell out, as much as possible, what's behind the increase. Tell customers why the price is going up, whether it's higher costs for materials, or soaring transportation costs. 

Bottom Line For Your Bottom Line:

Research shows that consumers respond not just to the price level but to how fair they think it is. If they think that a price increase is tied to profit-taking or to other hidden motives, they'll consider it unfair.

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Gilon Miller, CMO

About Author

Gilon is a seasoned marketing, sales and business development executive with over 15 years of experience in the software and Internet business. He is the Founder and CEO of GuruShots. Previously, Gilon was the CMO of Upstream Commerce, VP of Marketing at iMDsoft and Director of Global Marketing at SAP. He earned an MBA at the MIT Sloan School of Management and a BS in Electrical Engineering from Tufts University.
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