Sam Keller's TEC Blog

Thursday, July 29, 2010

You Can Raise Prices in a Downturn

In turbulent times like the present, the common wisdom when demand is down and competitors are fighting for every order is to cut prices, right? Not always.

If you and your customers understand the value of your product and/or service, you can—and should—charge more for delivering more by using "performance pricing".

This idea comes to me from work done by Harvard Business School Professors Frank Cespedes and Benson P. Shapiro who joined with former McKinsey Consultant Elliot B. Ross, President of the MFL Group, to write the paper "Performance Pricing in Tough Times."

Cespedes says, "Pricing builds or destroys value faster than almost any business action, especially in tough and uncertain economic conditions when price is a key and visible strategic choice. Conventional wisdom has firms cutting price in these circumstances. But most industries typically allow few firms to build a sustainable, low-cost business model, and once established, the very success of those low-cost competitors makes it difficult for others to duplicate."

In their paper, "Performance Pricing in Tough Times", the team of Cespedes, Shaprio and Ross describe their research of the many companies that don't compete on absolute cost advantages and low price. These firms can and should compete on the basis of initiatives for which their customers willingly pay higher prices.

Can this apply to your company?

Click here for the complete article to learn more about performance pricing. It's worth the read.

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