Online Exclusives

Increase Prices and Increase Profits?

By Tom Branna, Editorial Director | September 9, 2010

It may seem like suicide in a fragile economic recovery, but Rafi Mohammed urges companies to make the move to higher prices.

As the economy began to tank in 2007, too many companies found themselves in an all-too-familiar business spiral: lower sales forced them to reduce costs, which forced them to reduce overhead, which increased unemployment and reduced consumer spending power which, ultimately leads back to lower sales.


Rafi Mohammed is urging business executives to try a novel strategy—raise prices, don’t lower them. The author of “The 1% Windfall,” argues that companies that are quick to lower their prices only feed into the deflationary atmosphere that causes major headaches for companies.
“One percent works for consumer product companies,” argued Mohammed. “The main takeaway from my book is that most companies don’t realize the connection between price and profits. I’ve seen the 10K reports. I know that if a company raises its prices by 1%, on average, operating profits would go up 10-15%.”

In fact, using a 1% increase in price, some companies would see even more growth in profits. For example, according to Mohammed, Sears’ profit would jump 155%, while Tyson’s would increase 81% and Whirlpool would increase 35%.
“Now, more than ever, in this economy, pricing matters,” argued Mohammed. The author maintained that his book is the first to create a pricing strategy that works.
 
 
Even in a fragile recovery, consumers will pay higher prices.
“Most books on the subject are academic and only speak on the theory of pricing. My book focuses on the real world,” he maintained.
 
Other Solutions
 
Of course, some companies managed to thrive during the downturn using a variety of strategies.
“Consumer product companies did a fairly good job of surviving the recession,” noted Mohammed. “P&G was really good at it.”
 
 
Rafi Mohammed, author of "The 1% Windfall."
He noted that when the recession was in full force, P&G rolled out test versions of lower-priced products such as Tide Basic that were designed to compete with private label products. As soon as the economy started growing again, P&G pulled Tide Basic out of test markets.
 
“That move may have been premature, but it was an interesting strategy,” he recalled.
Meanwhile, according to estimates by the Private Label Manufacturers Association, 65% of all food and beverage companies are involved in private label manufacturing. By keeping their feet in high- and low-tier price groups, companies have been able to steer their way through the recession.
 
Companies in other industries are trying similar strategies. In telecommunications, Sprint recently announced a $300 million deal to provide service for Cricket, the discount cellular company.
For other companies, an increase in couponing helped stave off a steep decline in sales. According to Mohammed, the successful use of coupons, sales and promotions are ways to activate price-sensitive shoppers while keeping the base customers paying full price. This involves creating hurdles (such as early morning sales on off-peak days, making customers clip and redeem coupons, etc.) that allow budget-minded customers to credibly raise their hands to say, "Price is important to me," said Mohammed.
But whether a company rolls out lower priced products or offers discounts, Mohammed insisted that they must cut back on discounting in order to recoup their profits during a recovery.
 
“Too many companies run the risk of devaluing their products,” argued Mohammed, who noted that once the economy gets growing again, consumers will be slow to pay full price.

Consider this: with Domino’s, Pizza Hut and their smaller competitors offering multiple pies at ridiculously low prices, will folks ever pay $18 for a pepperoni pizza ever again?
Although he’s a proponent of using pricing to boost profits, Mohammed warned that he promotes that 1% windfall as a starting point for companies to realize the power of pricing.
 
“Believe it or not, many companies don’t realize the connection between pricing and profit,” he noted. “But you can change your prices on a Sunday night and start seeing profits on Monday morning.”

blog comments powered by Disqus
  • Innovation On Display

    Melissa Meisel, Associate Editor||February 3, 2016
    P&G Beauty Digital Studio showcases new products for 2016

  • It’s All About Teamwork

    It’s All About Teamwork

    Melissa Meisel , Associate Editor||January 4, 2016
    Collaboration was the theme of the Consumer Specialty Products Association 2015 annual meeting.

  • Burgeoning Beauty

    Burgeoning Beauty

    Melissa Meisel, Associate Editor||January 4, 2016
    A look at trailblazers for 2016 and beyond.

  • Buy the Sea, Buy the Sea, Buy the Beautiful Sea

    Buy the Sea, Buy the Sea, Buy the Beautiful Sea

    Tom Branna, Editorial Director||February 9, 2016
    Nova Scotia Fisherman makes a boatload of products that contain sea kelp and a raft of natural ingredients.

  • What

    What's on Tap for 2016?

    Nancy Jeffries, Contributing Editor||February 8, 2016
    CEW and NPD present their beauty industry review and preview.

  • Witch

    Witch's Brew: Dickinson's celebrates milestone in 2016

    Christine Esposito, Associate Editor||February 1, 2016
    Dickinson’s celebrates 150 years of witch hazel skin care with the biggest line expansion in the company’s history.

  • From Research to Retail

    Tom Branna, Editorial Director||February 1, 2016
    What began as research on skin disorders led a dermatologist and his father to create their own skin care formulas.

  • Between The Sheets: A look at the dryer sheet category

    Between The Sheets: A look at the dryer sheet category

    Christine Esposito, Associate Editor||January 25, 2016
    How has the fabric softener sheet category fared of late?

  • Morning Jolt…Before Coffee

    Morning Jolt…Before Coffee

    Christine Esposito, Associate Editor||January 18, 2016
    New caffeine-infused toothpaste launches on Indiegogo.

  • A Frosch Start in the US

    A Frosch Start in the US

    Christine Esposito, Associate Editor||January 18, 2016
    A trusted eco-savvy German household cleaning brand is now available in America.

  • 5 Things I Learned

    5 Things I Learned

    January 15, 2016
    The Avon & Women’s Dermatologic Society Mentorship Program. Dr. Sabrina Fabi (left) and Dr. Kimberly Jerdan.

  • Perfect Timing

    Perfect Timing

    Tom Branna, Editorial Director||January 11, 2016
    New ways of collecting data can help cosmetics companies understand what women really want—and when they want it.

  • When a Cosmetic Becomes a Drug

    When a Cosmetic Becomes a Drug

    Jacqueline Sheridan, Dinsmore & Shohl LLP||January 11, 2016
    The unintentional conversion of personal care products through marketing.

  • Unshrinkit Is Undeterred

    Unshrinkit Is Undeterred

    Christine Esposito, Associate Editor||December 21, 2015
    The biggest night in this startup’s history didn’t go as smoothly as planned, but the company’s co-founder is confident about the future of her specialty laundry product.

  • Africa, Rising

    Africa, Rising

    December 14, 2015
    Savvy marketers should expand their operations on the continent, according to speakers at a WFFC seminar.

  • Color, Your World

    Color, Your World

    December 7, 2015
    A kaleidoscope of concepts was the conversation at a recent NYSCC symposium.

  • Play Misty for Me

    Play Misty for Me

    Christine Esposito, Associate Editor||November 30, 2015
    Body mists for men and women continue to be the hottest commodities in the mass fragrance market.

  • The Space Between

    The Space Between

    Christine Esposito, Associate Editor||November 24, 2015
    Prestige Brands expands its platform with yesterday's acquisition of DenTek, a major player in the fast-growing “peg” oral care sector.

  • A Home of One’s Own

    A Home of One’s Own

    Christine Esposito, Associate Editor||November 23, 2015
    NeoStrata’s Exuviance has opened its first freestanding retail space, complete with on-site skin analysis and express treatment rooms.

  • Hitting a Wall(mart)

    Hitting a Wall(mart)

    November 9, 2015
    Walmart imposes slotting fees and that hurts a lot of Tier 2 and 3 FMCG companies.

  • That’s Quite an Achievement!

    That’s Quite an Achievement!

    Nancy Jeffries, Contributing Editor||November 2, 2015
    The CEW honors seven beauty industry leaders.

  • What

    What's Not to Love?

    Tom Branna, Editorial Director||October 26, 2015
    The sun care category is rife with issues, but there’s a lot to like about it.

  • Sharp Competition

    Sharp Competition

    Christine Esposito, Associate Editor||October 26, 2015
    800Razors.com signs a high-profile athlete to promote its growing direct-to-consumer razor and personal care business.

  • About a Boy

    About a Boy

    Christine Esposito, Associate Editor||October 19, 2015
    As a mom, Jenny Cupido wanted to solve her son’s skin issues. Now she’s raising an indie beauty brand too.

  • A Suite Deal

    A Suite Deal

    October 12, 2015
    Image Studios provides an innovative venue for beauty professionals seeking a new way to do business.

  • Step Aside Ladies

    Step Aside Ladies

    October 5, 2015
    Frey Brothers Create Oak & Musk ‘Mantergent’

  • For Their Own Good

    For Their Own Good

    Christine Esposito, Associate Editor||September 29, 2015
    With a rich heritage and recognized formulation expertise, FC Sturtevant Company is moving into the consumer marketplace.

  • What’s All the ‘Fuzz’ About?

    What’s All the ‘Fuzz’ About?

    Jeremy Kerstetter, Assistant Editor||September 28, 2015
    Lawyer presents the power and versatility of essential oils by adding them to her own handmade dryer balls.