“The single most important decision in evaluating a business is pricing power… If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”
– Warren Buffett
“You can determine the strength of a business by the amount of agony it goes through in raising the prices [of its product].”
– Warren Buffett
In today’s era of fake quotations, I do not claim the authenticity of neither of the aforementioned quotes, but the point is they make a lot of sense!
Changing the price of the product / service can easily find its place in the list of the trickiest decisions that managers take. However, while dealing with MBA students I have realized that often their worldview about changing the price is quite simple! Nothing can be further than truth!
Yes! It is true that of the 4 Ps of marketing mix, price is the most flexible one but that’s not the case every time. For young marketers, it is important to know that when the price gets ‘rigid’ and you cannot tweak it as per your desires.
But before diving deeper into that, for the sake of the less initiated ones, let us first explore why pricing is said to be the most flexible P.
Understanding this portion is simple because one can easily assess that in comparison to changing the product, place (channel) or promotion (communication mix), changing the price would require the least amount of time, effort and resources. Afterall, you cannot change product features overnight and neither can you change your established distribution system. Coming to promotion, which includes at least 2 aspects – 1) positioning, which is extremely difficult to change even in the long run, let alone in the short run – and – 2). The media – media plans are devised and media vehicles are booked a lot in advance and hence, it is difficult to tweak them at a short notice.
That leaves pricing, which can be changed through a mail to the channel, a new stamping on the product or by means of a new pack with new price marked on it. Some companies even keep the new packaging ready in reserve which has discounts already marked on them. This is done so that the new pack can be used instantly in case the company needs to counter a competitor’s move in the market or to deal with any other such situation. Hence, pricing is relatively more flexible than the other Ps.
Now, let us understand that at times, in certain circumstances changing the price [read: increasing] becomes extremely difficult. There can be at least two reasons for this:
Menu costs – Menu costs are the costs of changing the price. The term itself hints about an example to understand the concept. Suppose you start a small restaurant and because you are a freak when it comes to aesthetics, you decide to have wooden menus where the names of the food items, a brief description, and the prices are carved in calligraphy on a wooden board. Now after some time, you thought of changing the price of an item whose raw material’s prices have gone up drastically. Now, the problem is that in order to change the price of this one item, you will have to get all the menus rebuilt and that would cost you a lot. You know that the price of raw material of that food item might change again in some time. Now what will you do? As you can see, in this case, the cost of changing the price of a product is very high and it works as a deterrent.
Another similar scenario could be like this – you have a long distribution channel and there is a lot of stock which is lying with different channel partners. Now, and then changing the price of that product would require a lot of cost to be incurred. So, in this case you might go for a cost benefit analysis and consider the menu costs and compare with the benefits of changing the price and take a decision. Such scenarios were prevalent in the PC industry of yesteryears where companies like IBM, Compaq and HP etc had long distribution channels which carried a lot of inventory while the prices of some PC components were very volatile and fluctuated frequently. Companies found it very difficult to change the prices because the cost of changing the price was very high.
Positioning considerations– Sometimes the brand’s positioning works as a deterrent in increasing the price. Certain brands are positioned in a way that their customers start believing that if the brand would increase the price then it would be doing something unfair or unethical. In reality, it is just a perception but the marketers of these brands find it extremely difficult to raise the price.
One such case in point is Parle-G biscuits. In spite of ever-increasing prices of raw material (edible oil, sugar etc) Parle-G’s price was not changed between mid-1990s to around 2005. One strong reason is the positioning of Parle-G which is positioned as a food for masses and hence, its customers believe that it cannot be costly and the brand would be doing ‘injustice’ if it raises its price every now and then. In fact, Parle-G grew because it was presented as an ‘economic’ option to a large chunk of Indian population. Moreover, this positioning of Parle-G works as an entry barrier for the potential competitors. If Parle-G will increase the price then the competitors might get a foot in the door. In such circumstances, it is difficult for Parle-G to increase its price.
A similar and an even more interesting case is that of Coke, which did not change its price from 1886 to 1959. Yes! You read it right! Coke did not change its price for more than 70 years and during this time the world saw – 2 world wars, a pandemic and the great depression. It is anyone’s guess how much price pressure would be there because of such events. In spite of all that, Coke did not change its price. If you are a curious soul and love marketing, you must be craving to know – Why? Why? Why?
I leave you with a clue – it has to do with some very interesting “menu costs”.
Now, you become a Sherlock and find it for yourself! This way you will enjoy it more than just reading the story!
Disclaimer – this article is not to say that these are the only reasons behind price rigidity. There are many other reasons which restrict marketers’ ability to change prices, even if they want to do so.
The views expressed in this article are personal
Dr. Anurag has more than 20 years of enriching experience in teaching, training and practice of Marketing. His teaching interests are Brand Management, Services Marketing and Consumer Behavior. His research is mostly in the area of Brand Management and Consumer Behavior.
Along with a doctorate, he is also a qualified MBA (Marketing), PGDBM (Marketing) and Master of Commerce (Business Administration).
Currently he is associated with Goa Institute of Management. Prior to that he has been associated with IIM Shillong, IIM Bangalore, SIBM Pune, etc. He has been a visiting faculty at IIM Nagpur, IIM Trichy, IIM Bodhgaya, IIM Visakhapatnam, IIM Raipur and IIT Jodhpur.
He can be contacted at – [email protected] Connect on linkedin – https://www.linkedin.com/in/dr-anurag-dugar-93823522/