MARKETING - How to raise to the price of a product or service

To what businessman it would not like to obtain more benefits by its products? To raise the price can be a very effective formula. And not always it means to lose sales. A group of experts analyzes the variables that determine the price, the best strategies to elevate it without your product is suffered in the market and what products.

The dream of all entrepreneur is to be able to receive more by its products and to continue selling the same. It is certain that it is not a simple strategy, but, as the authors of the study insist the management of prices of the companies on Spain, of IE Business School and Simon-Kucher & Partners, can be most effective to obtain benefits. “From my point of view so much is not that the sales are suffered, as of which it can affect to the obtained margin or the reached benefits”, Emilio de Velasco, professor of IE Business School, coauthor of the report insists.

In fact, according to the calculations that realise, an increase of 10% in the prices of a product much more has impact in the benefits that an increase or similar reduction in the sales or the costs. Or in words of Ignacio Cuenca, professor of the school of businesses EAE: “If I raise to two Euros the price of my article, I can lose 1,000 clients, perhaps but the total revenue supposes 50,000 Euros more, consequently selvage less but I obtain more benefit”. First conclusion, then: “Pricing or strategy of prices is the greater handle to obtain benefits in the company”, it confirms Of Velasco.

However, which is doubtless is that if that prices policy is not made well can be until dangerous. In order to diminish the risks, the experts give us some you rule of when and how to be able to raise the price without suffering to us.

WHERE IT IS EASIER TO RAISE THE PRICE?

Products with multiattributes. It happens in the sectors where the evaluation criterion is not unique. It is valid for the trips, clothes or accessories. For example and following with the trips, the basic supply can vary based on the type of hotel, the excursions that choose, the room that wants, the type of pension… In the case of the clothes, any accessory or any distinguishing touch will allow you to play with the final price. In all of them it is easier to raise the price. In this chapter the personal decision of the client plays an important role.

Articles that are associated to the elaboration of raw materials. Somehow the consumer perceives that the increase of prices by the ascent of costs is just.

Tie products to the luxury and the exclusive feature. In the first case, because the public to whom goes directed does not find in the price a variable to consider. In the second, because the consumer which values is the total price of the basket.

or Shortage. The more little it is our product the more it is arranged to pay the consumer by him. This premise is in the origin of many speculative tactics, but he is real: we have seen it when the market has remained out of provisions of some product (oil, rice) or with petroleum (they lower the production and as result lifts their prices).
or Utility. The more useful it is your product and the more added value perceives the user, the more is arranged to pay by him.
or Differentiation. If the client perceives that your product is unique, exclusive, accepts that it must pay by him. It is what it happens the market of the luxury yet.
• In summary, we will be able to raise the price when the client perceives that your product or service owns some of these three characteristics.

As Jordi Brunat reiterates, professor of ESADE, “the key is in the perception of the buying client” and to know how to change the one that has envelope we or our products, he proposes two methods:

or Axis of generation of value based on the product. This one is the most habitual system of valuation for 50 years and consists of modifying the article to grant some added value to him. The system has a clear danger: any improvement forces to you to incur expenses and if you do not go fast the competition you can step on the way. It is a little what it has happened with the tourism of average range. “The cars have been comoditizando. Thus, which before was attributes added – as electrical air conditioning or elevalunas, by which you were arranged to pay an extra, have become comodities. This means that the cars of average range must fit their prices to those of the competition and increase costs since they have more equipment. It is what the perverse effect of the differentiation is called: to make a proposal of greater value than costs to you more and the differentiated value perceived is smaller, because the competition has taken to you. In this case you have been able to raise to the cost 20% and the client only perceives a 5% of improvement, consequently she will be only arranged to pay that 5%”, insists Brunat.
or Axis of generation of value in the consumer. Here one is to concentrate in the relation and the service that your product gives the client and to offer to him to a each exclusive proposal. “I want to you to sell this article because you are going it to use this way. That is to say, one is to maximize the value that he generates in the client”. We put as example a anorak. Analyzing this article, one would be to sell a product that isolates much and has the greater flexibility of the market. But also it would imply to know if the buying potential will use it to work, if it wants it to make sport… In agreement with his needs you would do a proposal or another one to him. The client will feel that it is a customized supply and will change its perception to him of the product.

In order to fix the price, first you must be realistic on the cost of manufacture of the product or the one of accomplishment of the service. It is necessary to determine the Technical Price. In the first case, it is easier to calculate (production, packaging, lists…). To this one it would be necessary to add the variable costs (of raw materials, distribution, logistic). The sum of both would give to the Price Total Cost us. This one is valid to make treasury, although it does not serve to obtain benefits. The normal thing is to add a margin on the sale, so that the formula would be: fixed cost + variable cost + margin. According to the study of the IE and Simon-Kucher & Partners, it is the system more used by the companies and, nevertheless, it loses potential margin. Why? It explains it the fact that when fixing the price without considering the capacity of payment of the client, loses the possibility of obtaining more benefit.

or Taking care of the competition. In order to calculate the margin to add it is important to know the prices the competition to know how if you are within market or and thus establishing inasmuch as people are prepared to pay a next product. The rank is placed in 20%: “That is to say, if the next maximum product is in 100, you can oscillate between 80 or 120”, explains Cuenca. “Superficially he must be something very exclusive and different”, concludes this expert. This system has its defects: on the one hand, when being conceited that the competition well is positioned and, and on the other, more pernicious, than you are to the will of the supplies of your competitors.

or Availability of payment of the client. It is the most intelligent form to manage your product, because of that way you avoid to lose possible benefits. Upon the case of the service, also it agrees to be realistic at the time of estimating the cost that supposes to you to provide services: if there are real expenses (transport, power material of support, expenses, taxes, rent…) more valuation of intangible (fixes a price to you to the hour or the day and ten in account how of different it can perceive your client the value of your supply. And the more different, the more you will be able to receive). Although he is not very practitioner, sometimes you can resort to the method test-error.

ELASTICITY QUESTION

However, when doing these calculations it is necessary also to consider the elasticity, that is to say the influence that has the price on the demand: in the clothes, for example, a price slope affects the sales directly, whereas in the light, a price increase usually does not reduce its consumption. And you do not forget the crossed elasticity, that one that measures how it affects to the demand of a product the ascent of price of another complementary one. For example, what would happen with the sales of the printers if they increased the prices of the red cartridges?

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