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The Cost of Changing Your Prices

Watch those price changes

There is no doubt that over the next couple of weeks, companies everywhere are going to be executing price changes as the new financial year approaches on the 1st July. This is a time for Pricing diligence.

There are two types of costs associated with making price changes. The first are what’s known as “physical costs”, which are associated with updating customer or consumer –facing prices: those found on store shelves, price lists, rate cards, websites and the like. In 2003, a paper by Mark Bergen, Mark Ritson and others[1] found that “in the retail grocery industry, the cost of changing prices is over $100,000 annually per store”.

But by far, the most expensive cost associated with price changes are the managerial costs associated with working out the magnitude of the price changes, what the new prices will be, and updating the necessary spreadsheets, systems and sales force tools and apps. One price change I devised for a client several years ago cost $285,000 to execute. Fortunately it generated $5.9 million in incremental revenue, so it was well worth the effort.

Given the time, effort and costs associated with changing prices, diligent execution over the coming weeks is essential. The stakes are high and errors can be costly, and history attests to this.

In 2007, United Airlines sold tickets from San Francisco to New Zealand for $1,062. The fare, sales of which were honoured, should have been $10,620 for Business Class. British Airways didn’t honour the 1,200 seats they sold from the USA to India in 2009 for $40. They were trying to increase prices by $40. And in 2005, Expedia advertised rooms at the Hilton Hotels in Tokyo and Osaka for $2 – $4 a night. No wonder one guest booked a one year stay at the Tokyo Hilton.

Over and under pricing probably occurs in equal numbers, but as I’ve mentioned previously, customers aren’t going to tell you about under-pricing. All the more reason for pricing diligence and vigilance over the next couple of weeks.

[1] Bergen, M, Dutta, S, Levy, D Ritson, M and Zbaracki, M (2003) “Shattering the Myth of Costless Price Changes: Emerging Perspectives on Dynamic Pricing” European Management Journal

This article first appeared on LeadingCompany.com.au on the 7th June 2012

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