The Power of Positive Pricing - Part 1

[hausdok]

Business is tough. You lose work to lower priced competitors left and right. You want to charge more, but you’re afraid. You’re afraid people won’t pay and deep down, you’re afraid your service isn’t even worth what you’re charging now. And yet, you can’t afford to improve. You’re barely making it as it is.

You need a dose of positive pricing

Positive pricing is setting price levels to support the quality of service you want to give people, that people deserve, and that commands a premium. It’s setting the price levels *in advance* of improving the service and then investing to raise service levels to meet your pricing.

Bill’s Dilemma

Bill was hired to improve an operation that was slipping. After years of steady increases, the number of sales fell the year before Bill was hired. Five years before Bill showed up, the operation was better than any of its closest competitors. Since then, quality fell to middle of the pack and was now, near the bottom. When the organization met one of its closest competitors head-to-head, it typically lost the battle.

Prices were middle of the road. The two competitors with the best overall quality charged over 10% more. The low price competitor, which charged less than half of Bill’s price, also had the lowest quality.

Bill immediately made two moves. He hired the best people he could find and he raised prices. He didn’t raise them a little. He raised them a lot. Prices went up 40%.

Bill now charged more than any of his competitors. His prices are more than 25% higher than the quality leaders.

Performance got worse before it got better. Transactions fell by 5% Bill’s first year and another 7% his second. The most loyal customer group shrank 9%.

Some wonder whether Bill’s price increase was a mistake. After all, 40% is a lot to swallow. What good does it do to raise prices if prices are driving away customers?

In reality, Bill didn’t have a choice. The people he hired and the other overhead he took on was necessary to improve quality. The price hike was necessary to pay for it.

Bill’s price hike didn’t cost him revenue. Yes, the number of sales fell by 7%, but the average sale was worth 40% more. Total revenue jumped by more than 30%. That’s huge.

Bill is Bill Byrne, the Athletic Director for Texas A&M. According to the Dallas Morning News, Byrne “has no regrets about raising prices, saying it was necessary to fund an elite athletic department. He believes a winning team will fill the stadium.â€