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Look at your value proposition; some have raised prices“A cynic is a man who knows the price of everything and the value of nothing."                                     --                Oscar Wilde

These days, when you ask a business executive “what’s on your mind,” pricing is on the short list. Is this the right price for this item? Am I getting the markup I need to be profitable? How much will the price affect the buying decision? Does the economic environment require that I drop my prices? Are they too high? If I lower some, won’t I need to raise others? What if the mix changes and the higher priced items don’t sell and the lower ones do? What’s my competitor doing? Why do people shop here in the first place? Ad infinitum.

Pricing is both omnipresent and eternally vexing. It’s at the core of a profitable business, the management of the supply chain and the strength of your brand. In its most pernicious form, however, the tempting seductress of lower prices, betrothed as she is to the Great Recession, promises robust sales and renewed growth to those who heed her imprecations. Following this “I need to lower my prices” philosophy, though, is like following Sisyphus pushing a boulder uphill only to be repeatedly cursed as the rock crests the hill, rolls back down and the trek begins anew.

So many companies have fallen prey to this temptation, insecure in their value proposition and assured that more customers will make up for the lower prices. How is that working for you? If you’re like most businesses during this Great Recession, not so well. Those new customers didn’t show up in droves as you hoped, and now that the economy is beginning to level off, the climb back to normal prices is like trudging through quicksand to ascend Kilimanjaro.

If you’ve ever stayed awake during a basic economics course, you’ve met the concept of price elasticity. In its most basic form, it is the “demand curve” that describes the relationship between price and demand. If you raise prices by 5 percent, what will happen to revenues? (You can visit http://tiny.cc/1k33z for a helpful primer on this concept.) Make sure to integrate objective tools in making your pricing decisions and don’t rely solely on intuition or “gut feel.”

Consider price management in the context of brand strength. Most of the time when a company is regularly discounting prices, it has a weak and indefensible brand. The company has done a poor job of promoting its value proposition and has usually failed to build a trusted relationship with its customers. That business is afraid that customers will go elsewhere if its prices don’t remain competitive – read, “keep dropping.” They haven’t convinced customers of the full measure of their value offering – or at least they don’t think they have and are running scared by constantly discounting prices.

Many successful middle market companies that have weathered this economic storm have raised their prices. Stunning, I know, because the first reaction is “that’s impossible” or “how could they?” They recognized that they have a relevant and defensible customer relationship, and their customers shop there for more than the lowest price – and here’s the most important truth about marginal revenue: While they may lose some customers by raising prices, they’ll more than make up for it with higher marginal revenue from the customers they do keep.

You must have a compelling point of view about your value proposition to establish a sustainable profit structure. You’re working hard enough, and your assets are working overtime to generate cash. Don’t give it back through weak pricing policies.

KBO.

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Lary Kirchenbauer is the president of Exkalibur Advisors Inc., providing practical business strategies for family and other privately owned businesses in the middle market. Exkalibur works closely with senior executives and their businesses at the intersection of leadership, finance and business strategy, and uses the Business Ferret framework to help companies use strategic finance to drive improved business performance. Lary also hosts the Exkalibur Leadership Forum for leaders of middle market companies in the North Bay. Please visit www.exkalibur.com for a library of valuable resources, articles and insights or join the Exkalibur fan page on Facebook.