I had an interesting question from the managing director of a shoe company, whose business it is to source and import high quality European shoes for the (rather charmingly described) “non-standard” foot.
The MD of the shoe business believes he is about to be squashed in the business equivalent of an F-clamp. The economic screw is turning and the top half of the clamp, the market’s downward pressure on price, is about to meet the bottom half of the clamp, the upward pressure from costs.
He has explored his internal options and thinks the only course of action is to raise prices, but says” “Given we are in a recession, is it business suicide to raise my prices now?”
Not necessarily.
In times of general cost increases, customers expect a price hike and most accept the increases with good grace. Sure, some will grumble but most customers are struggling with the same issues and understand that when costs go up, prices have to go up.
Many businesses actually don’t take advantage of this, because they believe that demand will crash. But look at this example. The recently released consumer price index figures for March showed an increase in the price of men’s underwear, whereas prices for other apparel remained flat.
Bucking the trend, it seems that undies maker Pacific Brands used the currency pressures in the second half of 2008 to justify a 5% to 10% price increase. Did it kill the market for men’s underwear? Not at all. Demand for men’s underwear actually increased.
Justifying an increase in price because of an increase in costs is a useful tactic, but if you are going to try for a price increase in today’s climate, you have got to be able to convince your customers, more than ever, that it is reasonable, fair and authentic to do so.
In another underwear example, the famous British retailer Marks & Spencer recently decided to charge £2 more for bigger bras on the basis that they require more engineering and materials! This caused such a public uproar that the company was forced to reverse their decision saying: “We boobed. It’s true our fantastic quality larger bras cost more money to make, and we felt it was right to reflect this in the prices we charged. Well, we were wrong.”
What did Marks & Spencer do wrong that Pacific Brands got right? Quite simply Marks & Spencer customers felt that the price increase was neither fair (it didn’t apply to all bras) nor authentic (larger bras have always cost more money to make so why start charging more for them now).
So, back to the shoe company. My sense is that they would have had strong grounds for increasing the price of shoes, were it not for timing.
Like many businesses, the shoe company held off putting up prices until the last possible moment. While noble, this doesn’t make good business sense. For the general public to feel you are being authentic, you need to align your justification for a price increase with consumers’ general knowledge.
Today’s strengthening Aussie dollar is going to make it hard for the shoe company to justify a price increase on the grounds of the exchange rate. To be blunt, consumers don’t care what exchange rate a company did business at, they just think about the world as it is right now. So as far as consumers are concerned, today imports just got a little cheaper.
Which begs the question, will we see a drop in the price of men’s undies?
Julia Bickerstaff’s expertise is in helping businesses grow profitably. She runs two businesses: Butterfly Coaching, a small advisory firm with a unique approach to assisting SMEs with profitable growth; and The Business Bakery, which helps kitchen table tycoons build their best businesses. Julia is the author of “How to Bake a Business” and was previously a partner at Deloitte. She is a chartered accountant and has a degree in economics from The London School of Economics (London University).
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Smart Company is a sister publication to The Mandarin, catering to Australia’s entrepreneurs, small and medium business owners and business managers.
