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. The first one was of a former senior financial manager in a company I worked at who was not exactly a convert to pricing or customer value discovery. Whenever anything was 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! But just think how much profit has been destroyed in businesses by opinions like that.

 

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. A Giffen good 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 can all understand that luxury items can be purchased to signal status, wealth or a similar perception. In this case, higher price can represent a customer value in itself.

 

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 in to 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“.