Chapter 4

Environmental Factors That Can Affect Your Pricing

In-a-Rush Tip

Read under the headings “The Economy” and “Competitors,” but you can skip the rest of the chapter. However, skim the headlines to make sure you aren’t skipping a critical area for your industry.

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Environmental Factors Overview

Environmental factors that marketers consider in setting prices are factors that are beyond the control of the company. They include:

• The economy
• Competitors
• Government regulation and legal
• Social trends
• Technological change

The Economy

The economy can have a large influence on the optimal price for your new product. But, it won’t affect all prices, so a knee-jerk lower price in a bad economy isn’t your smartest move. Following are some observations based on my years in pricing products and services:

• Don’t be the first competitor to lower prices in a bad economy. Here’s why:
  • Your customers won’t feel any extra loyalty to you for it; in bad economies, consumers think lower prices are just what they deserve. They absolutely will not love you for it—or even thank you for it.
  • Your competitors will probably then lower theirs, resulting in lower prices becoming etched in stone.
  • Maybe if you don’t lower prices, neither will your competitors. Then you’ll have a healthier profit margin in bad times.
• If your product is a necessity, you are less likely to need to discount.
• If you sell to consumers, you are more likely to need to discount—starting with the most expensive items such as cars and major appliances.
• If the bad economy drags on (as it did in 2010–2011), some consumers will discount shop even for the least expensive items. However, this doesn’t mean consumers won’t splurge. A premium bubble bath should always have a solid market, as long as it is marketed as a “little luxury” to relieve stress.
• When consumers give up big things (such as vacations, new appliances, etc.), they want to treat themselves to smaller luxuries.
• Selling to businesses in a bad economy sometimes seems to require ESP. As the economy worsens, businesses typically still spend on anything that advances the business. Until suddenly they don’t.
  • Businesses typically start cutting advertising and sponsorship money about three months into a recession. (And they lag three months into a recovery before they increase it.) Media typically start discounting when the cutbacks come.
  • Once a purchasing agent becomes involved in the buying decision, it’s a signal that some amount of discounting will be required, especially if the agent wasn’t previously part of the process.

Be careful in a recovery about raising prices. Consumers have strong gut reactions to what they perceive as “fair” in pricing. This is despite our capitalist definition of fair prices—that a fair price is what a willing buyer is willing to pay and a willing seller is willing to accept. That definition doesn’t always hold when prices go up.

Launching a new product with a higher price isn’t likely to run into the “fairness” problem, but raising the price on something already offered might. Particularly vulnerable to consumer wrath are:

• Necessities, such as food and rent.
• Disaster needs. After a hurricane tears down houses, a lumber yard might be able to get a very large price increase due to heavy demand. But they are risking a public relations disaster.
• Anything where consumers can find out someone else got a better price. In a fascinating book I highly recommend, The Price is Wrong by Sarah Maxwell, the author has research to show that what turns ordinary price grumbling into ballistic antagonism is less about the price itself than about two things:
  • Is the company fattening its pockets at the expense of desperate people? (see “Disaster needs” mentioned previously), or
  • Is somebody else getting a better price than they can get?

In times of economic change, you need to watch and understand your customers even more than usual. If price is secondary to other features (speed of delivery? warrantee?) then use restraint in lowering a price. But also watch your competitors. If a key competitor lowers its price, you will need to move quickly if you find it’s hurting your sales. But don’t assume it will. Make sure. Also, by watching your competitors closely in an upturn, you may be able to more easily raise your prices when a competitor does so first.

Warnings:

Competitors

The financial strength, number, and pricing-savvy of your competitors will all affect the price you can charge.

Stupid competitors can lower profits for all companies, sometimes even making an entire industry unprofitable. My definition of stupid competitors includes the following:

• Those who will always cut price to make a sale. They often find themselves in price wars that nobody wins.
  • Examples:
    • Magazine printers cut margins again and again to steal business from each other until there wasn’t enough profit to support any but the most efficient and most profitable printers. Many others went bankrupt.
    • The airline industry. Enough said!
    • Those so addicted to the sales boost that they run constant sales, causing consumers to devalue the “fair” price for that type of product or service.
    • Those who see the industry leader raising prices and don’t at least consider jumping on the bandwagon.

On the other hand, if you’re entering a field with one or more very powerful competitors, who keep prices low to discourage competition, you will have to differentiate yourself substantially in order to get buyers at an acceptably profitable price.

The good news is that by utilizing the Competitor Pricing Worksheet included in this book’s Appendix, you’ll be taking account of your competitive situation when you determine your optimal price(s).

Government Regulation and Legal

If the government regulates the prices you can charge, that is outside the scope of this book. Your “pricing” department is more a lobbying department.

But non-price government regulations can also affect your prices. Government regulations can change your product from “nice to have” to “required to have.”

As an example, consider new regulations about protecting the safety of your customer data, such as social security numbers, credit card numbers, etc. Companies that had spent as little as possible to do a “so-so” job, must now spend more—or face big financial penalties in addition to very bad press. In fact, the only price-limiting factor when government regulations turn your product/service into a requirement will be the number of new competitors that will jump into the market—many with lower prices.

Governments have a number of specific pricing regulations that companies need to know, although usually the government goes after the bigger companies and not the little ones.

One onerous U.S. regulation concerns your ability to declare your price is discounted from a previous (higher) price. The government has very specific requirements (that still, somehow contain “murkiness”!) as to how long you had to offer your product/service at the higher price in order to now declare it reduced. Most small companies ignore this regulation (or don’t know about it), but the government did sue Macy’s over this very regulation and won a big settlement.

The United States also has a number of laws about price discrimination—limiting your ability to give price breaks to one group or business compared to others—and price fixing.

If you’re planning to sell outside the United States, pricing regulations can get even murkier. For example, Europe has one set of pricing regulations for most firms, but a different standard for the leading competitor in each field.

If you can afford it, you should talk to an attorney who has handled pricing law as it affects your industry. As at least a first step, you can often talk your industry associations into having presentations from attorneys on marketing and pricing laws and regulations.

Social Trends

Social trends can have a strong impact on the price you command. For example, let’s look at the frozen food industry. For decades, consumers who bought frozen dinners did so with a great emphasis on price. But then two social trends led the way to higher price possibilities:

The same trends may also impact the business-to-business (B2B) marketplace. If consumers are buying more and more of a particular product, at healthy profit margins, the manufacturers of those products are under a greater compulsion to grow than to cut their costs. That means if you manufacture packaging for frozen foods, your customers may allow higher prices in return for faster and more reliable response time.

There are a number of firms that chart social trends, most of which charge very big money for their services. But if you Google “social trends America 2012” you will find a number of companies who have published some of their research.

For example, as of July 2012:

How does all this affect pricing?

• New products appealing to the leading edge of a trend can often command higher prices. (For example, frozen dinners have finally gone gourmet—offering much better choices for a single woman or man wanting gourmet food at home quickly and easily.)
• Products/services where demand is (or will be) shrinking often find themselves in a battle for survival—where prices will most usually shrink.
• How is your industry doing on the social front? A half hour spent searching for consumer trends might cause you to raise or lower your price—and therefore profit—opportunities.

Technological Change

Technological change, even in products other than your own, can affect your company’s pricing and sales. For example, I was publisher of Audio magazine for CBS when the music industry was switching from LPs to CDs. It was a great time for the magazine because most companies in the industry wanted to advertise their new (usually higher priced) products. It wasn’t just the sale of CD players and CDs themselves to replace your LP music collection. It was also sales of better (higher-priced) amplifiers and car music systems.

There are two downsides to this phenomenon:

Further, if you’re in a technology-driven industry, the time line for you to recoup costs and pocket profits is getting smaller and smaller. That means you need to price high enough to earn all the profits you can in the expected growth and maturity phases of the life cycle of your product. Once a competitor supersedes your invention, your goal will change to being able to sell off your remaining inventory—driving your price down quickly and sharply.