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MARKETING

Let's Make a Deal
 

The fine art of raising your prices in a recession.
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Sales and Marketing

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?

So when a large customer balked at paying $6.50 for one particular print, Sher asked if he would consider paying $5 for a similar one. Plugging a set of specs into the computer, he came up with a list of slow sellers that met that customer's requirements. Sher passed the catalog numbers on to the customer, who looked up the prints and selected eight of the suggested ones. Result: an $11,000 order. Plus, by unloading less popular prints, Sher can turn over his inventory faster. "We don't do it for little customers," he says, "but if I can get $11,000 worth of sales from an hour's work, that's a pretty good deal."

The technical term for what Sher is doing is in-market pricing discrimination, says Ronald Wilcox, associate professor of marketing at the University of Virginia's Darden Graduate School of Business Administration. Ten years ago it was rare for a business to base its prices on real-time inventory tracking, says Wilcox. Now it's relatively common for large companies but not so common for small ones. "The problem is that setting up the system where you have real-time inventory information costs a lot of money," he says.

Sher says he can't easily measure the impact of the price changes, since Bentley Publishing is still digesting three recent acquisitions it has made in the past two years. (Currently, its revenues are between $10 million and $20 million.) But he estimates that raising prices has already boosted his gross margins by as much as 3%. His margins will increase even more, he predicts, as he introduces more new prints at higher prices.

Just because Sher is willing to negotiate doesn't mean that he's a pushover, however. "You have to have some point where you say, 'That's my price," he says. Bentley's six salespeople still have to get Sher's approval before offering many discounts. And not all customers have jumped at the deals that Sher has offered them. "Some customers are more entrepreneurial and can react with an $11,000 order in three days," he says. "Other customers don't work that way."

Did the company lose any customers as a result of the price hikes? Out of 300 to 500 major customers, as many as 10 were on the brink, says Sher. But in the end, thanks to judicious discounting, only one of them jumped ship. "Price increases are tough. They're no fun for anyone," Sher says. "I don't want to say, 'Let's do it every year.' But I think we have to look at them every year at least. Small and medium businesses tend to be chicken about price increases. They leave money on the table."

Emily Barker is a senior staff writer at Inc.


Is the New Price Right?

Competition. Customers. Cost. In setting prices, the savvy CEO should look at all three elements, advises Thomas Nagle, coauthor of The Strategy and Tactics of Pricing. Competitors' prices are an obvious benchmark. But don't forget to add in the value that you're providing your customers. Figure out what makes your product or service distinctive, and be confident about charging for it.

As for cost, Nagle recommends a quick break-even analysis to make sure that your new prices will guarantee a satisfactory profit. After all, raising prices can lower revenues if enough customers decamp. How do you calculate how much sales volume you can lose without affecting your gross profit? Divide the percentage price change by the sum of the gross margin before the price increase and the percentage price change. So if you plan to raise prices 5% and your current gross margin is 50%, divide 5 by 50 plus 5, or 55. The result tells you that you can lose up to 9% of sales volume and still maintain your current gross profit. --Emily Barker


Hands On

Rock On: Want to inspire your star performers to hit the high notes every time? Run your company as you'd run a rock group. So advises Tony Lillios, who's done both. The CEO of 18-employee Speck Product Design, in Palo Alto, Calif., previously managed various West Coast rock bands, which he also played guitar in. In that career, Lillios found that the best bands let individual musicians develop their own approaches to each song. "When somebody says, 'Play like this,' you lose all the energy and passion and creativity," says Lillios. "It just doesn't have that magic." So in his current gig, Lillios encourages designers to improvise the same way, trusting them to make everything work together in the final mix. His refrain: "Be specific about general goals, but on a daily basis, let people do it their own way." That's the best way to guarantee a kick-butt performance. --Anne Stuart


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Please e-mail your comments to editors@inc.com.

Last updated: Jan 1, 2002




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