Let's Make a Deal
The fine art of raising your prices in a recession.
Published January 2002
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Last year Robert Sher felt squeezed. His company, 48-employee Bentley Publishing Group, based in Walnut Creek, Calif., sells art prints to retailers and wholesale manufacturers of ready-made framed pictures. The typical Bentley offering tends toward the serene: images of gardens and woodlands. But behind the scenes, it was anything but pretty. For a couple of years, Sher had been watching his labor costs creep up, his rent rise, and his margins get crunched. He found no easy cutbacks. "There is only so much you can do to reduce costs," he says.
Sher knew that he needed to increase prices. It had been three years since his last price hike. But he worried that charging more would drive away customers. "There's a huge amount of [pricing] pressure being applied by all the home-furnishing retailers, who are putting pressure on our customers who are framers. And the framers then put pressure on guess who," says John Chester, CEO of Wild Apple Graphics, in Woodstock, Vt., one of Sher's competitors.
By January 2001 there were plenty of warning signs that the once-booming economy was running out of steam. Sher had to wonder: Was this an acceptable time to ask his customers to pay more?
In a recession, customers take longer to buy and longer to pay their bills. At many companies sales are flat or down -- sometimes way, way down. The big temptation is to try to goose business by cutting prices. But that's not always a good idea -- not if you care about your bottom line. "You don't want to have declining sales and declining prices on top of that," says Thomas Nagle, chairman of consulting and training company Strategic Pricing Group Inc., in Waltham, Mass., and coauthor of The Strategy and Tactics of Pricing. "An economic downturn is when people tend to make the worst possible [pricing] mistakes because they don't think through the issues and what the impact is going to be long term. They're thinking about what they need to do to make this quarter's sales."
Sher isn't that kind of a short-term thinker. "We knew it was going to be a tough year, and one way to fight that was thicker margins," he says. So he raised his prices -- but strategically. He aimed to stay just a little ahead of his competitors. "We've always been a higher-cost, higher-quality provider within our market," he explains. "We're generally on par with our competitors but on the high side of average."
For starters, Sher didn't jack up prices across the board. By comparing his prices with his competitors', he found that he had fallen well below the industry average for his smallest prints. He raised those prices a hefty 40%. His large prints, he found, were already priced more in line with those of his competitors. He raised prices 5% for newly introduced large prints, while older ones stayed at the old prices.
But his most important step was keeping the lines of communication open with his customers. As is standard practice in the industry, Bentley Publishing Group has long given volume discounts. Now Sher was even more willing to do so. "We trained our sales force to be very sensitive to the needs of key customers," he says. "We presented it as, 'Yes, prices are going up, and here's why. But there's some flexibility.' That was really, really important."
Sometimes that flexibility simply meant that if a customer balked, Bentley Publishing was more than ready to make a deal. Take the case of the owner of a small frame shop who called recently to order 300 prints for an annual promotion. In 2000 she paid an average price of $1.33 apiece. Last year the list price for each print was $2. "It's a big increase for her," says Sher. "We said, 'What can you do?' She agreed to go to $1.50." This year, he adds, her price will jump to $1.60, still below list price but an improvement over $1.33 a print.
The big risk, of course, is that "you're going to convert what otherwise would be good customers into ones who feel that they now have to be difficult in order to remain competitive," Nagle says. Sher disagrees. "What I've seen is that nice customers just walk away" when faced with a price hike that they can't stomach, he says. "We still got a heck of a gain. Going from $1.33 to $1.60 is a very nice increase. I would rather get something than have them walk away and buy from a competitor."
Remaining open to good old-fashioned haggling was only part of Sher's gambit. He also took a look at his inventory software and realized that he wasn't taking advantage of its full capacities. His database already contained detailed information about each of the nearly 8,000 prints in stock: descriptions of color, size, subject matter, and style, as well as sales data. Why not put it to work for price-sensitive customers?
