PRICE CHANGE

The decision to raise or lower prices is a tough one, with many ramifications for your business. To put it another way, two companies who change prices on the same products by the same amount may get widely different results depending on how they implement the new policy.

Sometimes businesses announce major price hikes, even doubling their previous rates. One theory is that a single large price hike will get the pain over with. Businesses may also announce large price hikes when they've experienced major increases in the price of a key ingredient or cost component. A company that is being overwhelmed by sales volume from an unexpectedly popular product may jack up prices to reduce demand to a manageable level.

However, most price hikes are done in stages on the theory that customers will be accustomed to higher prices over time and be willing to tolerate them as they become more loyal. A series of smaller hikes may not even be noticed by customers who would be seriously put off by a single large one.

If a company has  more than one product, consider raising prices on some items while leaving the others the same, or even lowering them. Some customers are sensitive to the slightest price hikes for a particular item while mostly ignoring other increases. Automobile dealers use this fact to their advantage by cutting prices on cars as low as possible and attempting to make much of their profit on accessories like fancy paint jobs, about which customers are less price-sensitive.

There are legitimate reasons to change prices, of course. A company may want to get rid of its remaining inventory and introduce new versions of its products. Companies like Apple, Sony, Dell, and LG have to do this. And in nondigital businesses, many products are seasonal: It makes sense to mark down sweaters in April and linen suits in October, for example. Other valid reasons for changing prices include rising raw material or labor costs, encouraging customers to try something new, and rewarding loyal customers.

But customer reactions to cavalier pricing actions may make quick fluctuations unproductive at best, and inflict lasting damage to a company’s bottom-line at worst. Prices should be changed only as often as the enterprise’s tactical objectives and overarching goals dictate.