Selecting Final Pricing Levels

April 13, 2006

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Final pricing levels for products should have flexibility for both increases and discounts to customers. Price increases may be inevitable because of component, ingredient, and processing cost increases. The market may or may not absorb price increases without decreasing volume effects.

For example, overall coffee market volume remained steady in the United States for many years, despite several price increases. However, once ground coffee retail prices went over $4.00 per pound during the 1980s, market volume began to decline rapidly as people switched to tea or alternative beverages. The introduction of espresso coffee bars and specialty blends of coffee during the last 10 years has helped to reverse this decline, despite continued higher prices. Better grades of coffee and flavors are now being enjoyed by American consumers.

Price decreases due to buyer volume and promotional discounts cannot always be planned for. Competitors may react to each other with unusual defensive or offensive "deal" programs that heavily discount pricing to customers for volume purchases. Discount pricing is an often-used tool for market leaders to successfully defend against smaller competitors.

Conversely, competitors seeking to gain market share with aggressive offensive low-price discounts may not be successful against a firmly entrenched market leader with loyal customers.

Recommendation: If in doubt, price on the high side, where possible. It is always easier to discount prices than to raise them.