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Pricing Demand Curve

December 3, 2006

And the day came when the risk it took to remain tight inside the bud was more painful than the risk it took to blossom. ~Anais Nin

I was meeting with a successful family business that had been in the retail food industry for over 35 years. All four of the grown children worked in the business. Some were full-time and some were part-time, but they were all committed to the success of the venture.

This business was in a unique situation having both very little and quite a bit of competition at the same time. Now, before you think that I have lost my mind, let me explain. Only one store in the area was providing the same product, yet many of the big box grocery stores were providing similar products. As a result, their sales had been relatively flat and they could not afford to use advertising as a means of increasing sales.

In situations like these, often a simple price increase can be immensely helpful as 100% of the surplus flows directly to the bottom line. So, before launching into a marketing plan, I started by asking about pricing. What I discovered was that they had not raised their prices in over five years, and, based on the managing sibling's reaction, I could tell that they were resistant to doing so now. He feared that a price increase would cause them to lose business.

A potentially valid concern, I inquired about the amount of price sensitivity they currently experience with their products. The owner answered that most customers hardly look at prices. They come to their store because they know they can expect to find high-quality, fresh products. When I asked if they had experienced much customer resistance to price increases in the past, he answered that they had not.

Based on these key responses, I surmised that the demand for their products was inelastic. In non-economic terms, "inelastic" simply means that a price increase will not affect the demand or sales of the product. This inelasticity results from the customers' perception that they are buying a custom product - one that can not be obtained easily from any other vendor. They will therefore be willing to pay a premium for it.

Consequently, the firm raised their prices by 15% across the board. They received no complaints and experienced no decrease in sales. In terms of units, sales stayed the same resulting in a significant profit increase. This small change transformed their business from a marginally profitable venture into one that can now develop a marketing plan to expand sales.

As this case illustrates, it is critical that each entrepreneur scrutinize the pricing schedule of their products or services. Are price and demand in balance? Can you raise prices without negatively affecting your sales volume? Like with this entrepreneur, small changes in pricing can amount to significant differences in profitability.

You can do it!