by Adam Juda on Friday, February 20, 2015
Consumers are generally unhappy when they see the goods that they buy increase in price. As the products become more expensive, customers will complain and some will begin to rethink their purchasing decisions. This presents a problem for companies as it limits their ability to increase their prices. So what's a company to do in order to increase its profitability?
Here are a couple of possibilities:
- Reduce costs by increasing production efficiency
- Increase net income by selling to more customers
- Decrease costs by reducing quality
- Increase net income by raising prices (hoping that the increases in per-unit income offset the reduced number of sales)
Each of the above strategies has worked in the past and will continue to work for many companies. That said, there's another method that's much sneakier. What if companies could raise their effective prices without notifying their customers? It happens more often than you'd think. This article from The Consumerist demonstrates the shrink-ray strategy. Companies quietly reduce the quantity of goods sold in a standard package, making sure that customers don't notice that per-ounce prices have been increased. Indeed, some companies have the gall to keep the size of the physical packaging unchanged, so as to ensure that consumers remain ignorant of their little switcheroo.
Given that information has never flowed more freely or been more searchable, I believe that this is a losing strategy in the long run. It takes only one customer to notice the act for a firm's attempt at deception to be exposed to the masses. One can take a peek at the recent lawsuit over Subway's not-quite-a-footlong sandwiches to see how outraged consumers can cost a company dearly.
Depending upon the product and market, it may make sense to simply be forthright with one's customers and visibly raise prices. To those who would argue that raising prices will crush demand for any product, I'd point out that it wasn't all too long ago that lobsters were an undesirable food fit only for servants and prisoners.
Of course, no single piece of advice will fit every situation. Pricing is very important to any business strategy, but it can be tricky to master. Why not read through my book on software pricing or contact me for a consultation?