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Courage to Charge More


Most businesspeople I know would do anything, anything other than raise their prices. Few prospects send as many corporate chills down as many corporate spines. Indeed, much of recent business planning--and the search for productivity--has been focused on how to keep prices stable, and in fact, lower them through a variety of efficiencies. Supply chain management, just-in-time inventory, and the boon of Bangalore: outsourcing.

There's an entire area of econometrics, in fact, built around the notion of price elasticity. All kinds of complex modeling is done to determine what happens to market share and consumer demand when prices are increased by specific amounts, calculations that include supply and demand metrics and other variables. Research has even shown the price elasticity can be seasonal; for example, consumers are willing to pay more for "branded" butter during the holiday season, but will buy generic alternatives at other points during the year.

I'm not going to dispute the ability to project, mathematically, the effect of price changes through this kind of quantitative analysis. But I do believe that in many markets, far greater price elasticity exists than is credited, but businesses don't accept that the continuum exists. As a result, they resort to a kind of anathematic behavior, which actually locks them into a downward spiral of price competition when there are other dimensions in which to attract, win, and keep customers.

A relevant example is the much-abused, but still-relevant phenomenon of Starbucks. I doubt if Howard Schultz did any fancy-schmancy price elasticity modeling to determine if consumers would pay three bucks for a cup of coffee. Further, had he done so I question if the econometric tools would have been up to the task. How do you measure what consumers will pay for something that doesn't exist yet? The environment, the ethos, and the brand experience of Starbucks are collectively separating the latte buyer from his money in a way that would have been beyond projection.

But it's not just about paying a premium price for luxuries. It's not just about the obvious status and badge-value products. And this is a really important point. Consumers and B2B buyers are willing to pay more across many areas because there is a depth of frustration that savvy marketers can tap into. Take the mess that is known as customer service today. The level of indignation with 800# service is profound, particularly when it comes to technology. Writes USA Today: "Tech service horrors are nothing new, of course. War stories abound of people who languish on hold only to finally reach a support rep even more befuddled than they were. No company seems immune. But the situation appears to be worsening."

If I were an entrepreneur running a computer retail business today, I would develop a customer service center that would charge consumers a fixed annual fee, say $50, that would guarantee them prompt, friendly, efficient telephone support. Not unlike the model of concierge medicine that many physicians are implementing as a reaction to the factory-like assembly line that the HMO model--and its brutal efficiencies--creates. I'd bet that there is a great degree of price elasticity for this service; and isn't it a better way to compete than by slashing prices to meet those of Best Buy or Circuit City? An independent retailer can't win that way, but he can win by pushing pricing up in areas where consumers are being let down.

Remember also that Whole Foods Market can charge a premium because they recognized that consumers are willing to pay for beautifully merchandised organic products from a company that shares their values. Historically, supermarkets thought that marketing consisted of battling over who could charge less to entice someone to squeeze the Charmin. In another category, Verizon became the largest cellular carrier--in a viciously price-driven market-- without being the low-cost provider.

When a market heats up with a new competitor, or when a business loses a major client, anxiety erupts and the impetus shifts to growing (or surviving) by discounting. It's a common disease, one that afflicts both the largest enterprises, and the local office supply store when Staples moves into town. In many ways, it's a natural loss of confidence and an up-swelling of self-doubt--how loyal are my customers, anyway? But letting your competitors dictate the rules of the game is a losing proposition.

Instead, recognize that while some of your customers are price-driven, a portion of your customer base--often a surprisingly substantial one--is probably willing to pay even more for what you offer. Each segment applies its own price/value relationship to a transaction. You need to identify the segment that values what you offer outside of a cheaper price--understand it better--and market to it, aggressively and relentlessly. That probably means a willingness to shift from a top-line to a bottom-line focus, which can be a healthy reorientation, making for a stronger, more resilient enterprise.

It takes a degree of courage to push the boundaries of price elasticity, but it crystallizes the need to recharge your business by developing differentiated, loyalty-building products and services. And there's no better way to elevate your business' immune system, to provoke those antibodies that drive out foreign invaders. Just because Wal-Mart is the largest company in our economy doesn't mean that we are nothing but a Wal-Mart economy.


Last updated: Sep 1, 2004

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