When and how to raise prices to cover costs and ensure profitability are key issues for retailers. But there is a wrong way and right way to do this.
Consider these observations from professors Kusum L. Ailawadi and Paul W. Farris, writing for the Wall Street Journal:
“Slashing promotions may seem like a good idea. A higher price is obvious when someone picks up a product in a store. So, why not keep the price the same and make a move that may not be noticed: pull back on coupons, special offers, and other deals? The trouble is, customers do pay attention. Our research shows that shoppers put much more weight on coupons, markdowns, and other offers than even sophisticated firms realize.”
“Sometimes, firms cut costs by lowering the quality of their main products. Or they keep quality high for their main brand and introduce a lower-price, lower-quality extension to satisfy shoppers on the tightest budgets. But the move is likely to backfire. People may just buy the cheap brand instead, so sales of the regular brand will end up suffering.”
Doing It Right
“You can’t raise prices every day. So, companies should cover not only the higher costs that they’ve incurred up to that point, but also costs they anticipate down the road.”
“Firms should spell out what’s behind the increase. They should tell customers why price is going up, whether it’s higher costs for ingredients or soaring transportation costs.”
“Research shows that consumers respond not just to the price level but to how fair they think it is. If they think a price increase is tied to profit-taking or other hidden motives, they’ll consider it unfair. They are more likely to accept the increase if it’s tied to higher costs, such as a fuel-price surcharge.”
“It’s also important to consider which products get a price increase.”
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Illustration by Brian Stauffer