Read this week's required article: "How Companies Can Get
Smart About Raising Prices". Retrieved from the Ashford University
In a three- to four-page paper (not including the title and reference pages):
- Explain how to successfully get customers to pay more for your products. Reference the article in support of your response.
- Explain how a specific pricing strategy will allow you to raise the price on your product successfully.
You must use at least three scholarly
sources from the Ashford University Library, one of which must be peer
reviewed, in addition to the textbook. Your paper must be formatted
according to APA style as outlined in the Ashford Writing Center.
Here is the attached Article:::::::
Carefully review the Grading Rubric for the criteria that will be used to evaluate your assignment.
How do you get customers to pay more for your products?
It's a question no company wants to face. Raise prices in the middle of a
sluggish economy, and they risk alienating customers they can't afford
to lose and leave themselves vulnerable to competitors.
Yet they have little choice but to ratchet up. The cost of making
consumer goods and getting them to stores has been rising for some time.
And a lot of the old strategies for shaving overhead, such as
outsourcing, are getting less effective in economic terms and more
unpopular in humanitarian terms.
Passing along costs while keeping customers happy is a tough balancing
act--but it can be done. Companies should resist the urge to cut
promotions or camouflage price increases, which often backfire. Instead,
they should focus on minimizing the pain for shoppers who are the most
sensitive to price increase, by targeting discounts at them and offering
different versions of their product at different price levels.
Here's a look at some things companies shouldn't do--but often do
anyway--along with some smarter alternatives for raising prices.
On the surface, it seems like a good idea. A higher price tag is obvious
as soon as somebody picks up a product in a store. So, why not keep the
price the same, and make a move that may not be noticed at all: pull
back on coupons, special offers and other deals?
The trouble is, customers do pay attention. Our research shows that
shoppers put much more weight on coupons, markdowns and other offers
than even sophisticated companies realize.
In the early '90s, Procter & Gamble Co. cut promotions and coupons
significantly. Our research showed this experiment misfired, and after a
few years of share losses, the company restored promotions. More
recently, there's J.C. Penney Co.'s failed strategy of cutting back on
the frequency of sales; the company lost nearly $1 billion in 2012.
(P&G and J.C. Penney declined to comment.)
No, people often don't know the exact price they paid for something. But
they have a very strong perception of whether something is a good
value. And they base this judgment on how often a brand or store offers
markdowns, promotions and coupons. Promotions also let companies hold on
to customers who are on tight budgets and need the deals the most.
Let's say a food maker raises the price on a cereal but offers a coupon
at the same time. Only people who are watching their pennies will take
the trouble to clip the coupon and redeem it, while many others will
simply pay the higher price.
So, the company is raising the average price consumers pay for their
product--without driving away customers who might otherwise seek out a
Along those lines, there's also an important psychological component to
promotions. It takes a lot of work for people to clip coupons and mail
in proofs of purchase. The effort involved makes deal-prone consumers
feel like smart shoppers--and smart shoppers are happy shoppers.
Sometimes companies try to cut costs by lowering the quality of their
main product line. Or they keep quality high for their main brand and
introduce a lower-price, lower-quality extension--called a fighter
brand--to satisfy shoppers on the tightest budgets. Think Bounty Basic
and Charmin Basic, which were rolled out a few years ago. Or, for a bit
of ancient history, recall Kodak Funtime film.
But the move is likely to backfire. People may just buy the cheap brand
instead, so sales of the regular brand will end up suffering.
Or the company may not make it clear that the fighter brand is a budget
offering that doesn't have the same quality as the main brand. People
may buy it, be disappointed and turn away from the whole product line.
Another move that usually backfires: cutting how much product people get
in a similar-looking package while charging them the old price. A
bottle of soda might shrink by a couple of ounces, or you might get four
fewer cookies in a pack--so the price tag doesn't go up, but the price
per unit goes up.
Why doesn't this approach work? For one thing, most of the cost of a
typical packaged good is tied up in packaging, transportation and other
aspects of production--not in the product itself. As a result, lowering
the quantity is unlikely to preserve a company's margins.
Plus, when consumers discover that, say, the chocolate bar they just
bought is smaller but the price is the same, the backlash can be costly
and visible. People who feel that they're being cheated or tricked can
be very angry customers--and these days, social media give them an easy
way to publicly voice their anger.
Less can be more, but only if companies can position small packs as a
virtue and charge a premium for them. Think 100-calorie Oreos or
Marlboro Shorts, for instance.
So, what's a more effective way to raise prices? Start off with basic considerations.
First off, unless you're an airline, you can't raise prices every day.
So, when companies do make the move, they should cover not only the
higher costs that they've incurred up to that point, but also costs they
anticipate down the road.
Companies should also spell out, as much as possible, what's behind the
increase. They should tell customers why the price is going up, whether
it's higher costs for ingredients or soaring transportation costs.
Research shows that consumers respond not just to the price level but to
how fair they think it is. If they think that a price increase is tied
to profit-taking or to other hidden motives, they'll consider it unfair.
They are more likely to accept the increase if it's tied to higher
costs, such as a fuel-price surcharge.
It's also important to consider which products get a price increase.
Think about this: If a food company has vegetables and ice cream in its
stable of products, which one should get a price increase?
The ice cream. Everyone, even people who are financially strapped, needs
staples, so it's important not to price them out of reach. On the other
hand, indulgences like ice cream, cookies and cosmetics are
discretionary purchases, so people tend to be less price-sensitive when
they buy them.
Another important consideration: timing. It's better to raise prices
when introducing a new product, for instance. New products are usually
improvements, and new features can justify new prices.
Timing also involves keeping a close eye on the competition. Price
increases can turn into a standoff--with nobody wanting to make the
first move, even if all of the companies in a market are facing the same
Rather than wait to see who blinks first, the market leader should lead
at the appropriate time and give rivals a chance to raise their own
prices and follow along.
Likewise, companies that don't dominate the market should follow the
market leader quickly, unless they're not facing the same cost increases
as the leader or if they're prepared to see their profit margins shrink
for strategic reasons. It's going to be their best chance to raise
their prices and cover their costs.
After raising prices, companies should rely on discounting to keep their
coupon-clipping customers--the ones most likely to jump ship if they
think they're getting a bad deal. That means taking a close look at who
their customers are and who should get what promotions. Think about the
coupons that are printed on your receipt at the checkout line and how
they're tailored to what you just bought and what you've bought before.
There are a number of ways to tackle the job of targeting deals.
Companies can start online communities to take the pulse of their
customer base and work with stores to get access to the data they
collect at checkout. They can drill down pretty far into that
information, targeting unique deals to individual shoppers, but that can
get expensive and isn't even necessary. It's enough to group customers
into segments based on things like their purchase history and how
sensitive they are to price.
When evaluating the success of these plans, though, companies should be
sure that they look at the right metrics. They should remember the
bigger point of offering promotions: holding on to their most
price-sensitive consumers by allowing them to use the discount, while
letting others pay full price so that the average price paid for
products goes up.
Percentage of sales with a discount and coupon redemption rates do not
measure success. Customer retention, incremental sales, and incremental
profit are much better measures, even if tougher to assess.
Instead of coming up with low-quality fighter brands, companies should
"unbundle" the features of their products and let customers pay for the
extras they want.
For instance, companies might take their core product, remove the bells
and whistles and lower the price. Call that the "good" version. Then
they might add a pricier "better" version that has extras and a "best"
option fully loaded with features at an even higher price.
Consider Apple's iPad Mini, which ranges in price from $329 to more than
$659, depending on how much connectivity and memory people want. The
$329 iPad Mini isn't low quality by any means--it works fine for people
who just want a machine for browsing and don't need to save a lot of
This strategy works in a couple of ways.
First, a bare-bones "good" version becomes a competitive option for
price-sensitive consumers who might otherwise choose a cheap product
from a rival. Let's say that a shopper is prepared to spend $250 or so
on a Kindle Fire. If there's a $329 iPad out there, it isn't hard to
convince them to make the switch.
Likewise, people who were interested in a company's product in the first
place may trade up to a more expensive version because of context
effects--which basically means changing your preference based on what
else is on the shelf.
If somebody is planning to buy an iPad Mini and the only choices are a
$329 and a $659 model, they are less likely to leap to the higher price.
But, if there is an intermediate "better" option at $459, it looks like
a reasonable compromise.
Companies should be sure that "better" products have attractive margins,
though, since an array of good, better and best products favors the
compromise option in the middle.
Finally, it's important for companies to make their products seem more
valuable, so price increases will go down easier with shoppers.
Consumers form ideas about what a company usually charges and what the
product is worth compared with competitors--a concept called the
reference price. They judge the value of a product based on the
difference between what is being charged and the reference price in
their head. One way to boost that reference price: put together packages
Let's say a company makes skin-care and beauty products. It can put a
bunch of those items into the same box, call it a "home spa package" and
sell it at a premium. The idea is to get customers to compare the price
to a day at a spa--the reference price for the product goes up, in
comparison to which the package is a much better deal.
Likewise, companies might package a number of foods together into a
complete family meal that supermarkets can sell in their deli section.
Encouraging customers to compare the price to dinner at a restaurant or
takeout raises their reference price--and therefore raises the perceived
value of the packaged meal.
Dr. Ailawadi is the Charles Jordan 1911 TU'12 professor of marketing at
Dartmouth's Tuck School of Business. Dr. Farris is the Landmark
Communications professor of business administration at the Darden School
of Business, University of Virginia. They can be reached at
Credit: Kusum L. Ailawadi
2013 Dow Jones & Company, Inc. Reproduced with permission of
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