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.
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.”