Many companies feel the need to improve their “competitiveness” in a downturn, and they think the best way to do so is to drop their prices. Wrong! Sure, in a recession your sales will drop, but if you also drop your prices, your contribution margin will drop even further, making your company less profitable and possibly resulting in a loss of profitability altogether. If you do, it means you have given up, and taken the easy road. You need to fight back. You need to utilize the recession as a way to improve your long term business results. Pricing champions do!
Pricing champions find ways to increase their prices, or increase their price realization. They fight back. They become even more successful and they increase their competitiveness by adding cash to their war chest, and improve and invest in product and market development.
Let’s take a look at two price champions:
Dow Chemicals, one of the largest chemical companies in the world, reported Q3 revenues that where up 13%, while volume went down 9%. In anticipation of the recession, the company increased prices by an average of 22% across the board.
Here is what Andrew Liveris, chairman and chief executive said:
“The company's ability to take protective measures has helped the company ward off the effects of the current economic downturn. The company has initiated two broad-based price increases and implemented aggressive cost controls.”
Dow is not giving up. They planned for the recession and they used pricing as a strategic weapon for that purpose.
The second pricing champion is a relatively unknown company called Parker-Hannifin, a diverse manufacturer and number 279 on the Fortune 500 list – probably the largest company people haven’t heard of. On October 16th they reported last quarters’ results - a 10% increase in sales over the previous quarter, and a 9% increase in profitability compared to a year ago.
So let’s see why. Here is what Timothy K. Pistell, EVP, CFO said in the prior earnings call, July 31, 2008
“Part of our “Win Strategy” is strategic pricing. We think we have done a very good job through this last fiscal year. The fact is that the gross profit margin improved in ’08 over ’07. Right now, we forecast our price increases will stay on pace with our cost increases.”
What they both have in common is that they do not drop their prices in a recession. They plan for price increases and cost control. They don’t give up. Certainly, they see a recession as a difficult time, but, they also realize that these difficult times are what weed out the long-term winners from the losers.
So you have a choice. You can follow the lead of the pricing champions, and use this economic downturn to your advantage or you can give up. What will you do? What long-term effect will strategic pricing have on your business? What will you do with all that extra profitability?
Again, the choice is yours.
With positive and "do-the-right-thing" regards,
Per Sjofors
Founder, Managing Partner
Atenga Inc
www.atenga.com
per@atenga.com
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