Price, Can it Bring Back Demand? Mark Burton - Holden Advisors - New Orleans Growth SummitWEDNESDAY, MAY 13TH, 2009
What price is low enough to bring back demand? A number of businesses are facing this question right now. At what price do you believe it is possible for the automakers to bring demand back for new cars right now? If you don’t believe that’s possible, ask yourself why have you ever considered lowering your price as a strategy to stimulate your sales? Lowering your price may get you a sale from your competitor, but it won’t increase the demand for your product or service.
Mark Burton’s presentation on Pricing with Confidence fit in nicely with Victor Cheng’s recession proof stories.
The rules of pricing are the same in good times as in bad. If you try to fix demand with price, nothing happens except you decrease your revenue, profit and the most important factor, your value position.
Here are a couple of questions to ask yourself about pricing:
· What’s your purpose for price?
· How consistent is your leadership in supporting your prices?
· If there are any inconsistencies, what are the leading causes?
Discounting Mark indicated is the crack cocaine of management. In fact, if your company can eliminate discounting, you can improve your margins by 20%. Sounds inviting doesn’t it?
Here are Mark’s rules for Pricing in a Recession:
Rule #1: You can’t price your way out! Price is a fool’s game – anyone can play it. And in a recession, where demand is inelastic it accelerates the rate at which profits are drained from your industry. If firms try to use price to increase sales, competitors respond, and price wars break out. When this happens profits disappear. During all of this, demand keeps going down, without recovery.
Rule #2: Set realistic volume goals. Don’t lie to yourself or your organization about what is possible. Otherwise your team will kill themselves trying to achieve the impossible and will often use price to chase unattainable volumes – and still fall short of the goal.
Rule #3: Make the hard decisions: Reduce capacity and costs rather than stick to unattainable volume forecasts. Restoring balance to the supply-demand equation is the single most powerful way to maintain pricing power.
Rule 4: The entire executive team must agree to and support single purpose for price: creating sustainable profitability. Recognize that customers will capitalize on any confusion surrounding your purpose for price and negotiate for ever-increasing discounts. This is the gift that will keep on giving. You will give up revenues and profits now and will have to dig out of a deeper hole once business picks up.
Next blog will answer the question of how a mouse dances with an elephant and the most important thing to recognize when negotiating.
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