Pricing Strategies That Appease Customers and Stock Investors Simultaneously (Part 1)
How do you justify a Gross Margin loss? Some elements of expense are beyond management control. A US product that uses semiconductors made in Europe has to cost more in 2008 than during the previous year. Who should bell the depreciated dollar cat? Unilever is a prominent example of a major corporation which has opened 2008 by confessing that sales have grown faster than profits. We have published an article earlier entitled “Price Competition is the Principal Stock Value Destroyer”. This piece is a sort of counter-point. We want to examine cases in which stock investor interests are best met through selling price increases.
Selling price increases across-the-board of an industry or a sector are the easiest to execute. Cartels are criminal but commodity prices rise and fall in tandem. Farm products and natural resources are prime examples, and the crude oil case hurts all of us most! Some sectors have clear leaders, which gives them great degrees of freedom to change selling prices. These giants have economies of scale on their side, so smaller competitors have to toe the line. Rivals of Tata Motors in India are now busy pushing ancillary suppliers to cut their prices, after the Nano was launched in January 2008 as the world’s cheapest car.
The ‘Horses for Courses’ Stock Guide to Product Pricing
The product category, the decision-making model of customers, and the brand positioning, are the three marketing factors that determine effects of selling price changes on business volumes. This principle has utilities for stock investors, business executives, and small business owners. Luxury brands can get away with selling price increases much better than people who sell unbranded generics. We will happily cough up co-payments for outrageously priced drugs that can save lives, but will quibble endlessly for even minor increases in bus ticket prices! The brand position is a function of seven Marketing Mix elements other than Price: Product, Promotion, Place, People, Process, Physical Elements, and Preferential Customer Services: a price increase will work in business terms only if the marketing people juggle the other seven elements appropriately.
Business Management Gurus stress the role of service in sweetening bitter pills of selling price increases. You may not even notice small changes in a diner menu provided that servers make special efforts to make you feel welcome and at home! Most automobile brands are assembled from the same types of engines and other parts. It is the dealer who clinches or breaks a sale. The showroom and after-sales service experiences largely determine whether you stay with a brand or make a switch when it is next time to get a new car.