While listening to a radio call-in show focused on business issues, the program's host and the expert guest were wrestling with the issues of pricing and the recession. Unfortunately, the interview was an exercise in the blind leading the blind with neither having a good understanding of the issues surrounding pricing.

Price Establishes Perception

The radio program host was in favor of reducing margin or profit in response to the trying economic times and seemed to advocate that pricing is a function of market conditions. When times are flush, prices can be raised. When the economy is spiraling downward, prices must be reduced.

The underlying assumption in that approach is that market share is what is most critical. Maintain or grow market share through price reduction to tide the business over through the lean times and when the economy sparks back up; the market share will remain and customers will be willing to pay the higher price point.

There is an inherent danger in this approach that eluded the radio talk show host and the guest. As they congratulated themselves for having solved the conundrum of pricing in difficult times, they missed a few points:

The consumer or shopper's point of view
Value provided
True costs

In the lack of any additional information available, or if other information available does not steer the customer to form a different conclusion, most purchasers of products default to pricing representing the equivalent

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benefit. A ten dollar bottle of wine is assumed to be of lesser quality than a forty dollar bottle and a contractor selling his services for seventy-five dollars an hour is presumed to be better than one selling himself for fifty dollars an hour. Certainly, there are times when a product or service at the lower cost is "good enough" for the job to be done even if there really is a discrepancy in performance. However, once a product or service has been priced at a particular point, it is not easy to move the buying public off of that expectation or perception of value. For instance, a two-liter bottle of cola from Pepsi or Coca-Cola is so often put on sale at 99 cents, that shoppers have been conditioned NOT to buy it at the so-called regular price point of $1.89. In the perception of the shopper, the beverage is only "worth" 99 cents, because that is what they paid for it last time, they have seen it available at that price previously, and therefore, see no compelling reason to pay more for it. Should the beverage manufacturer stand firm on the regular price point now, even though they have tremendous market share currently, the majority of shoppers will switch to another brand. The reduction of price has become so institutionalized now that the beverage companies are forced into maintaining the price point with little opportunity to raise it no matter what the economy eventually does in the future. Regardless of the true value or benefit of the product, the price point has been determined by the market and trying to move the shopper from that price point upward will result in loss of market share and customer loyalty. Lastly, the price and margin should be at least partially based on the actual costs required to purchase raw materials, produce the item or provide the service, and other costs. At some point, if the price becomes too low, it prevents the company from sustaining their ongoing business. Research & Development into new products suffers, infrastructure enhancements are put off, new products are not brought into distribution, etc.

Introductory Pricing

One of the times where it does occasionally make sense to be at a reduced price point is when a new product is being brought to the market. Without history behind it, many suppliers will attempt to get customers to switch from their current preferred brands or suppliers and try the newly introduced offering. Market researchers keep a close eye on what is known as "trial and repeat" to measure the propensity of the shopper to try a product and then make at least one additional purchase of it within a time period.

Many shoppers will concede to trying a new product if the risk is reduced for them. By lowering an expected price point, the risk is minimized for the shopper now as s/he considers that the new product can't be too much worse than the preferred brand, or at least the delta between the two is significant enough to merit trying the new one even if it is not as high quality. Then, the provider of the new product hopes that the performance of the product will be such that the shopper or consumer will recognize the value and be willing to maintain future purchases with the new product and become loyal to the new product.

For this to be effective though, there has to be a clear message that the price is ONLY for the introductory period and that is significantly less than it might otherwise be priced at on an ongoing basis. The establishment of worth or value through a mention of the regular price is essential so that shoppers can understand and recognize that the product is NOT to be assumed to be a value brand or offering that competes solely on price. The reduced price is a special offer that will expire and is to generate trial and excitement.

Raising Prices

One of the hardest things to accomplish as a marketer or business owner is the raising of prices. As the cost of raw materials rise it stands to reason that prices will rise along with it. However, some small businesses find themselves in the squeeze between having to absorb higher costs, but feeling unable to pass along the rising costs to their customers.

One effective technique is also the simplest - communicate with customers that prices are going to rise at a future date but if they place their orders before that date, the business will honor the current price. Very often this puts a sense of urgency behind the decision to buy now versus later for those customers that would eventually purchase, but may not be quite ready to do so now. It also serves to get customers to stock up at times and that may remove them from the marketing reach of your competitors. If a customer has more than sufficient quantity on hand of a product or has received a service that effectively takes them out of the market for the same product or service for a duration of time, competition is hard pressed to sway them to try their product or service.

By offering customers to buy now instead of waiting, it may also serve to help control costs by allowing the business to purchase raw goods in larger quantities and potentially receiving a better cost on those materials. Finally, by communicating with customers the realities of the pricing situation, the business can also open a dialogue about what other options, products or services, the client or customer may desire from the business.

Pricing is not something that should be taken lightly and a unilateral decision to just cut price in the face of competition, economic downturn, or any other outside influence is not always the best approach. Communicating why a product or service is worth the price is always a better approach and one that will be viewed more favorably by customers. The only suppliers that use price reductions successfully as a long-term strategy are the commodity suppliers or those that aspire to become one where price is the major lever available to generate sales. For most small businesses, the economies of scale forbid being able to compete solely on price without there being a quality component attached to it.

David Zahn is a serial entrepreneur and consultant to Fortune 100 businesses (www.zahnconsulting.com) as well as entrepreneurial startups (www.startupbuilder.com). His books, "How To Succeed As An Independent Consultant, 4th Ed.," and "The Quintessential Guide To Using Consultants" are frequently cited by other authors and have been used as textbooks in college and MBA classes.

The opinions expressed are the author's and not necessarily those of connpost.com. Please direct comments to cdauber@ctpost.com.