How to Raise Prices without Alienating Customers - Coursework Example

HOW TO RAISE PRICES WITHOUT ALIENATING CUSTOMERS Name: Course title: Instructors Name: Institution: Date: Introduction In the recent past, most of the consumers have become highly price sensitive on products or services they consume. This is due to increased knowhow, especially in the area of technology, which have enabled customers to easily shop for quality products and services at reduced prices. Further, customers spending abilities have drastically reduced as a result of increased food and fuel prices in the international markets, thus leading to raised price sensitivity levels. Rundle-Thiele & Waller (2010) indicates that, pricing is process that determines what will be received by a business in exchange of products or services offered by the firm. The main factors, which affects pricing includes manufacturing costs, competition, market place, quality of products, prevailing market condition among other notable aspects. Price is one of the most important elements of all four Ps of market mix, namely product, place, promotion and price, being the only element that generates revenues. Therefore, most of the business owners are sensitive to the aspect of pricing, as failure to do this will affect the theory of business continuity. It is worth noting that, over 80% of businesses that increases prices on products ends up loosing a substantial number of their customers, resulting to a 20% decrease on annual revenues. This is due to the fact that 20% of annual revenues in a firm originate from 80% of the firms loyal customers (Schullz, & Lauterborn 2003). Based on this aspect, most of businesses owners categorically explore other possible avenues of reducing the operational costs, as opposed to increasing prices to remain profitable. Others spend time to keep, customers’ o the loop regarding possible price increase, so that when the prices are increased, this does not come as a surprise to the customers. This paper will critically evaluate on ways of increasing price without alienating customers (Chekitanm 2005). Reasons for increasing prices There are many reasons why businesses are increasing the prices of their commodities in the recent past. The most important aspect is the increase in operational costs resulting from raised prices of fuel in the international markets. For instance, since the onset of global economic melt down that started in developed countries such as US and Europe, the price of crude oil has increased by more than 20% to approximately $ 100 per barrel. Consequently, the operational cost of has drastically surged for most of the companies, resulting to reduced profitability levels over the last three years. For instance, global companies such as General Motors, Royal bank of Scotland, British Airways among other notable firms are affected by the increased operational costs, a factor which has necessities bailouts from their respective governments (Dennis 2001). The other factor that has resulted to increase in prices is the need of improving on existing quality of products or services offered. Global and domestic companies have realized the fact that majority of the customers, seeks to purchase good quality products despite the high prices. The main reason for this is that good quality products lasts for longer duration as well as offers improved services as opposed to low quality products. Further, there is the notion that high quality products are those sold at higher prices and the vice versa. Other factors that results to increased prices of products and services includes raised inflation rates in most economies leading to raised borrowing rates from financial institutions among other notable aspects (Paladino 2005). Potential risks of increased prices As indicated by the case study, there are many potential problems associated with increasing prices of products and services offered by a given firm. While it is the function of businesses to regulate on prices of goods and services they sold, to ensure business continuity, many firms are often reluctant to pass on raising costs to their loyal customers. This is drive by the general fear that, the business may lose their hard-earned loyal customers as well as struggle to get new customers (Rundle-Thiele, & Waller 2010). As indicated by Robert Powell a director of private and entrepreneurial client services for the BDO Kendall’s , many business owners explores other means of reducing on their operational costs prior to increasing the prices of commodities. This is due to the fact that that most of small and medium businesses are close to the bones as operational costs are concerned, indicating that they have to raise the prices of goods or services on offer to remain profitable. It thus becomes important for them to know how to survive price increase as it poses great danger to firms if not adequately handled. One of the greatest potential risks associated with increased increasing prices is loosing the price sensitive customers even if there is improvement on quality of products or services offered. In many instances, firms that have increased the prices without adequately explaining the associated reasons for increase experiences at least 20% decreased customer base (Schullz, & Lauterborn 2003). As a result, the price sensitive customers use substitute products that are cheaper and affordable. For example, if a firm increases the price of coffee, customers start using other beverages such as tea, cocoa among others to substitute the product. It is based on this fact that Carolyn Creswell, the managing director and owner of Carmans Fine foods, explains that customers should be informed of any price changes to consequently raise their sales volumes. Due to the high potential risks faced by her company upon increasing the prices of products, Carolyn Creswell itemizes every ingredient of the products. This way she is bale to explain how the price has gone up in talks with the supermarket buyers about putting up on the raised prices of her muesli products. Consequently, Carmans that appeared on 2007 BWR Fast 100 of one hundred fastest emerging companies, turned over $ 16 million in 2007 representing a 57.63% increase fro the previous year (Paladino 2005). Despite the potential risk of loosing loyal customers, firms should adequately educate their existing and potential customers on the need of increasing the existing prices of products and services. By doing this, there is formation of a close relationship between the customers and the firm hence increased sales turnovers. Managing price increase From the case studies, it is clear that there is an urgent need for firms to explain reasons for price increase to their customers to manage their sales revenues. To most of the small and medium businesses, there is need of accounting the number of products of products or services sold on weekly basis as well as sales price to cover the operational cost and make acceptable profit margins. This aspect becomes more vital as operation costs increases, as the firms have to sell more products and services as well as increase their profitability. To achieve this there, business owners should explain the need of raising the prices of their products or services, failure to which the firm may end up loosing loyal customers (Dennis 2001). It is based this background that Tim Riches, the managing director of brand consultancy Futurebrand, indicates that organisations must adopt the right marketing strategies which establish and establish value in pricing their products or services. He argues that when customers are discerning on what they spends their money on, it does not change their underlying desires of buying the products when prices change. For instance, airlines such as American airlines, British airways, Skywest airlines among other notable global airlines, have successfully passed the raising prices in fuel to their loyal customers through fuel surcharges along other marketing strategies. For firms such as Carmans Fine foods, marketing perspectives such as re-defining value of the firm by adopting various ways of ways of pricing its products to cater the needs of price sensitive customers (Powell 2008). For the airlines and service industries, regular use of promotion, such as reward per mile among others to maintain and attract loyal customers when the prices increase is one of effective ways. Generally, firms should understand on the needs and wants of the customers, invest in market research and increasing on product relevance to increase sales volumes. Ethical issues in raising prices Despite the competitive environments in which the businesses are currently operating in, there is need of adopting the right forms of ethics when raising the prices. Failure to do these results to reduced customers trust, thus frequent lawsuits that may take up firms’ revenues as well as time. By developing right forms of pricing ethics firms, especially monopoly businesses, can justify for increased prices of goods and services. This can be inform of increased cost of labour, increased statutory taxation, and raised prices of operational costs such as fuel. Other ethical issues involved in an organisation raising its prices includes demand for positive customers support, need of attracting ethical investors, improved business awareness and brand recognition among other ethical values. Conclusion From the above information, it is clear that pricing is one of the most viral aspects of four Ps in market mix. By employing healthy pricing strategies, it becomes easy for a firm to remain profitable even if there is an increase in prices of goods and services as witnessed in the case of Carmans Fine foods. In conclusion, firms should involve their customers when prices adequately whenever there is a possibility of price increase to maintain steady profitability of the firms both in the short and long run (Rundle-Thiele & Waller 2010). References Chekitanm, D. 200. In the Mix: A Customer-Focused Approach Can Bring the Current Marketing Mix into the 21st Century. London: Rutledge Publishers. Dennis, A. 2001. Introduction: Marketing principles and practice. Pretoria: Macmillan Publishers. Paladino, A. 2005. Marketing Core Concepts and Applications: Asia-Pacific. Sydney: John Wiley & Sons. Powell, G. 2008. Marketing Calculator: Measuring and managing your return on marketing investment. Chicago: Chicago University Press. Rundle-Thiele, S., & Waller, D. 2010. Marketing. Sydney: John Wiley & Sons. Schullz, D, & Lauterborn, R. 2003. Marketing Communications. New York: NTC Publishing Group. Read More