In the most recent issue of Fortune magazine, columnist Geoff Colvin wrote in his column, “Yes, You Can Raise Prices”, that some companies, including DuPont, McDonald’s, and Colgate-Palmolive, are actually increasing their prices in these difficult economic times.
Colvin uses the Purchasing Power Matrix to demonstrate that companies currently in the best position to raise prices are those whose brands are perceived as both unique and necessary. Brands considered to be both commodities and discretionary are in the worst position to raise prices; brands that are either unique and discretionary or commodities and necessary are grey areas that must be analyzed further.
Colvin’s article reiterates some important principles about pricing. First, your price can speak volumes about the strength of your brand. If you attempt to cut prices in order to increase revenue, you may see a short-term increase in sales, but a long-term deterioration in customer perceptions of your brand.
Secondly, product differentiation – in the eye of your customers – can greatly influence your pricing power. If you can make your product or service stand out from others and it offers benefits your customers believe no competing product has, you will be in a greater position to increase prices.
How do you know whether your brand is a strong candidate for a price increase? Here’s where marketing research comes in. Know your customer. Even if you sell only one product, your customer base may be very diverse. How does each customer segment perceive your product?
You may find that Segment A perceives your product as unique and necessary, but Segment B perceives it as a necessary commodity. With that information, you might consider charging Segment A a higher price, and test a higher price with Segment B’s customers in selected markets.
Using the Pricing Power Matrix as a starting point and combining it with commonly used pricing research methods (e.g., discrete choice modeling, conjoint analysis, Van Westendorp, or Gabor-Granger) can provide valuable information about the optimal price you can charge for your product, and yield clues as to how unique and/or necessary it appears to your customers.