Yes, You Can Raise Prices in a Downturn

HBS Working Knowledge

This post originally appeared on HBS Working Knowledge.

If you and your customers understand the value represented in your pricing, you can—and should—charge more for delivering more. An interview on “performance pricing” with researchers Frank Cespedes, Benson P. Shapiro, and Elliot Ross. Key concepts include:

  • Pricing builds or destroys value faster than almost any business action.
  • Performance pricing seeks to maximize both the customer benefit and the selling company’s profitability.
  • The idea is to create more space between the value provided to customers and your cost.
  • Performance pricers make attractive returns in almost every business—at least over the full business cycle.

As economic turmoil continues, many companies are reconsidering their strategies with an eye toward going lean and slashing prices.

And that might work for a few companies—but very few. Instead, companies should compete “on the basis of initiatives for which their customers willingly pay higher prices,” says Frank V. Cespedes, a senior lecturer at Harvard Business School, who spent 12 years running a professional services firm.

That’s right. Higher prices, not lower.

“Competing on price is ultimately a bet on your cost position.”

Cespedes teamed with Benson P. Shapiro and Elliot B. Ross to write the paper “Performance Pricing in Tough Times.” Shapiro, an authority on marketing strategy and sales management, is the Malcolm P. McNair Professor of Marketing, Emeritus at Harvard Business School. Ross is a former McKinsey consultant and President of The MFL Group in Beachwood, Ohio.

In this interview the researchers discuss pricing strategy and what ingredients are necessary to convince customers that higher prices are worth the cost.

Read the full article.