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Pricing patterns are predictable. Use them to your advantage.

May 2, 2011 by Dale Furtwengler — President, Furtwengler & Associates, P.C.

It's fascinating how predictable pricing is, especially during changing economic times. During economic downturns the vast majority of companies discount heavily in failed attempts to salvage market share. When the economy begins to recover we see a spate of price increases, ostensibly to offset the price increases the sellers are experiencing.

Interestingly even during good economic times we see companies discounting to gain "market share" without accurately defining the market. These companies see new potential buyers entering their markets and they want to capture the lion's share of these new customers. This behavior, like those of the economic downturn, are very predictable. How can this knowledge help you?

Before we explore that question we need to understand the implications of these predictable pricing behaviors.

Discounting during an economic downturn

When I ask companies why they discount during an economic downturn I get one of two answers. Either they say "I'll lose market share if I don't." Or they say "All of my competitors are cutting their prices. I have to cut mine to remain competitive."

In both instances, what they're really saying is that they're afraid of losing business. The presumption on their part is that all business is equally valuable, that all customers are equally profitable. You and I know that isn't the case.

Here's what really happens. Buyers shift their spending to those things that they value the most, dropping those things that have little value to them. Sellers who discount their offerings during an economic downturn fail to realize that they're going to lose the moderately interested buyers regardless of what they do. Lowering the price isn't going to change these buyers' buying habits. They're still going to buy what's most important to them.

These sellers also fail to realize that they are foregoing revenues that they could continue to enjoy from the customers who really do value what they offer. We're talking about the people to whom your offerings are so important that they'll pay your price in good times and bad. In essence you're giving them an incentive to stay when they don't need one.

With this pricing strategy you're not only losing the revenues from marginally interested buyers, you're giving up revenues from your ideal customers. Remember, these are self-inflicted wounds; they're choices we're making. We can't blame the economy or our competitors for these decisions.

Discounting during good economic times

Times are good, we have extra cash burning a hole in our pockets. We can't wait to spend it on something new and exciting, right? Well, almost. We want to spend this extra cash, but the item we're considering is a little more than we'd like to pay so we negotiate the price. Sellers seeing an opportunity lower the price and get your sale.

When sellers see this pattern repeated time and time again, they think "I could capture a lot more business if only I lowered by price by..." Or they think "There's a huge market out there that's untapped. All I have to do is lower my price and I'll capture a huge segment of this market."

Whether they realize it or not, these sellers are making a decision to go after buyers who are only marginally interested in what they offer. To capture this market they're lowering their price at the same time that they're adding infrastructure to accommodate the additional volume. Another double hit to the bottom line.

From our earlier discussion we know what will happen during the next economic downturn. These buyers are all going away. How can these predictable patterns help you? By doing the opposite of everyone else is doing.

What to do

In good economic times, raise prices instead of lowering them. This allows you to enjoy higher prices and margins from those who value what you offer without adding infrastructure costs.

Yes, you'll forego some short-term revenues in the process. You'll also miss out on the costs associated with trying to please buyers who don't really value your offerings. Is there ever a way to make a moderately interested buyer completely happy? Not in my experience.

During economic downturns, instead of following your competitors' leads and discounting, raise your prices 3 percent. It's a small enough increase to prevent most customers from considering one an alternative to your offerings. Even if they do go to one of your competitors, unless they have the same or better experience than they had with you, they'll be back. Why? In tough economic times we always return to value.

Another advantage of raising prices during an economic downturn is the message it sends to the market. The price increase says:

• We provide great value.
• Our customers love us so much they wouldn't think of going anywhere else.
• We're not worried about the economy, we're enjoying great success.

Aren't these the messages you want to send to your customers? Isn't this the impression you want the general public to have of your company?

About Dale Furtwengler

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