Product pricing: can you actually sell more by increasing prices?

 

 

The article we published a couple of days ago on price elasticity reminded me of two things. First the former senior financial manager in a company I worked at; who was not exactly a convert to pricing or customer value discovery. Anything presented to him on improving margins through pricing optimisation, the answer was always the same; “you can only boost sales by cutting prices to the bone“. Thankfully, opinions like that are becoming less common! Think how much profit destroyed in businesses by opinions like that.

 

Pricing, specifically the issue of raising prices, is a very complicated part of retail business. One which merchants often think about with dread. There are times though when it becomes necessary to raise prices in order to keep up with rising costs of supplies, to increase profit margins, or for any number of other reasons.

 

Frequently though merchants will raise their prices at a whim without the appropriate amount of research, and without employing a pricing strategy. This often leads to a loss of customers and a decrease in sales.

 

 

 

 

Giffen good  quotes

 

The second was a more distant memory of my economics studies and the concept of a Giffen good. Quoting from Investopedia:

 

A Giffen good is a good for which demand increases as the price increases and falls when the price decreases. It has an upward-sloping demand curve, which is contrary to the fundamental law of demand which states that quantity demanded for a product falls as the price increases, resulting in a downward slope for the demand curve. A Giffen good is typically an inferior product that does not have easily available substitutes, as a result of which the income effect dominates the substitution effect. Giffen goods are quite rare, to the extent that there is some debate about their actual existence.”

 

The most commonly cited example of a Giffen good is that of the Irish potato famine in the 19th century. During the famine, as the price of potatoes rose, impoverished consumers had little money left for more nutritious but expensive food items like meat (the income effect). So even though they would have preferred to buy more meat and fewer potatoes (the substitution effect), the lack of money led them to buy more potatoes and less meat.”

 

 

 

Can we actually sell more if we increase product pricing?

 

For real practical purposes in developed nations in 2017, the concept of a Giffen Good may not be that appropriate – however, there is the potential for similar results if instead of substitution effects we look at the concepts of luxury pricing strategy and market positioning and also the more psychological aspects of pricing. See our blog on pricing strategies and tactics.

 

It is certainly possible that sales can be boosted by increasing prices – to signal perceived scarcity or luxury status (see our blog on psychological pricing). This may be the case when people think an item may be inferior due to a seemingly very low price. For example, the luxury goods companies spend lots of time understanding how they are perceived in the market and then tailoring their pricing and marketing to reflect and influence that metric.  We all understand that luxury items can be purchased to signal status; wealth or a similar perception. In this case, a higher price can represent a customer value in itself.

 

Research your Pricing Strategy on Product pricing

 

We would be really interested in hearing if you have any real-world examples of increased product pricing leading to increased sales? Of course, it is not possible in every product pricing scenario – but when you really dig into customer value through a value discovery process and look at pricing structure, it is likely to be at least possible in more situations than we expect. For a humorous example of this – see the classic British comedy show Harry Enfield in “I saw you coming“.

 

The most important part of your pricing strategy is your research because this is the main way you will know if it is time to raise your prices.

 

The first thing you should be researching is your costs. You need to know the prices of your materials, production, shipping, packaging, etc. So that if the price of one part of your production process rises, you will know about it. Prepare to respond.

 

The second thing you need to stay on top of is your profit margin and your sales levels for specific products.

 

A product that is selling well might be a good candidate for a price raise. So that you can increase your profits on it. Another product to keep your eye on would be your new products. If, for example, you started selling a new product at a lower price so that it could gain traction. You’d have to know when it has actually caught on; in order to know when you want to raise the price.

 

Implications

 

Raising prices need not be a pain for you and the customers. Proper research and planning can ease the shock of the price raise.

 

A great way of getting away with a price raise is by increasing the perceived value of your products. The greater the “value”, the higher is the price.

 

If you sell related products, you can put together product bundles that will offer added value to your customers. For example, if you sell computers you could create a bundle that contains a computer, a mouse, and a keyboard.

 

Conclusions

 

Be honest when raising your price. Simply announce that you are raising the price citing the reasons for the increase.

 

If you want to lessen the blow of a price raise, you might want to consider raising your prices gradually. It won’t be a shock caused by a larger change.

 

When the time comes for raising prices, make sure that you think about the different methods available to you. Consider which option will fit best with your store, and which methods have worked for you in the past.