80-Price Increases at the Time of a Sales Decline

Will a price increase help or hurt the business? Many price increases work well. Others are much more problematic. This blog describes a few cases where companies had to decide whether to increase prices in a tough market, where demand was declining. The answers that each company found suggest a simple rule for us to follow.

Posted 2/16/09

The world’s largest manufacturer of home appliances, Whirlpool Corporation, has seen a substantial decline in revenues and unit sales in the last few months. The company, as well as the rest of the industry, has responded with lay-offs and other overhead streamlining. And one other thing…a price increase. Despite the price increase, Whirlpool expects to gain market share in this troubled time for its industry.

Hertz Global Holdings, Inc. raised its car rental rates at North American airport locations an average of $5 a day, or $30 a week. The problem is that fewer travelers are renting cars, so the industry is struggling with higher costs.

In the magazine industry, newsstand sales of magazines are falling at the fastest rate in decades. Here again, the industry can point, in part, to increases in the cover price of magazines for a fall-off in sales.

The international food giant, Unilever, raised prices more than 9% world-wide in the fourth quarter of 2008. At the same time, world-wide commodity prices had fallen with a collapse in demand. The result: a bunch of unhappy food retailers. Oh, and private label food sales are taking more market share.

These price increases, at a time of declining demand, are dangerous moves. (See the Perspective, “How Price Kills Profits” on StrategyStreet.com.) If everyone in the industry follows along with the price increase, it will prove to be a boon for all industry competitors. But there’s the problem. In most declining markets, at least some competitors, if not most, will discount to maintain their current sales volume at the expense of their higher-priced competition. If these discounting competitors succeed, the industry leaders will see their market shares fall and will, eventually, have to reduce their prices.

The real purpose of a price in a tough marketplace is to discourage a competitor. Do that and everything else will work out, eventually.

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Update 2022

Both Whirlpool and Hertz have had their struggles with new competition over the last 12 years.

In 2020 the worldwide household appliance industry was led by Medea Group at $40 billion in sales.  Gree Electric Appliances followed at nearly $29 billion in sales.  Whirlpool ranked 3^rd with $20 billion in sales.  In 2018 Samsung accounted for nearly 20% of all refrigerators, washing machines and microwaves sold in the US, its Korean competitor, LG, held 15.7% of the market while Whirlpool owned 15.4%.  The Whirlpool market share has been on a slow decline.

There was a great deal of turmoil in the automobile rental market over the last decade or so. First, came the emergence of many forms of alternative mobility solutions, including bicycle and scooter rentals, ride hailing, ride sharing and car sharing services. There was turmoil as the industry Standard Leaders acquired many of the low-cost Price Leader competitors. The Avis Budget group bought Payless rental car in 2013 and Zipcar the same year. The Hertz Corporation bought Thrifty and Dollar rental car in 2012.

By 2021, Enterprise had become the dominant leader in US auto rentals, in both cars in service and US revenue. The Avis Budget group was a distant 2nd followed by Hertz at number 3. These 3 competitors controlled the large majority of the rental car market. The number 4 competitor in the industry had less than 10% of the revenues of number 3, Hertz.

Price increases, unless done judiciously, can reduce rather than increase profits. See what we mean HERE.

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Update 3/26

I said something in the 2009 blog that probably confused a number of people. Here is what I said: The real purpose of a price in a tough marketplace is to discourage a competitor. What I should have said is that the real effect of a good price in a tough marketplace is to discourage a competitor. This does a better job of separating what your plan might have been with a price increase and what it actually ended up doing for your business. A good price increase improves margins without ceding share to competitors who might choose not to follow the price increase.

Price increases in an industry are often neutral in their effects. The industry finds itself under pressure from falling demand or cost increases and the leaders of the industry raise prices to keep their margins stable or even increase them. All the other competitors in the industry match the price increase so no competitor enjoys price advantage over another.

Some price increases encourage a competitor. These are bad strategic moves. Margins may improve somewhat in the short term, but market share is destined to fall as customers migrate to the less expensive competitor. Then the company raising prices loses both margin and market share over time. We see this often in markets as they slide into Overcapacity. We call this phenomenon a Leaders Trap. There are many examples of the Leaders Trap on our website’s glossary of terms and in many of these blogs.

Let’s return to the three companies we mentioned in 2009: Whirlpool, Hertz and Unilever. Whirlpool raised its prices but competition did not follow completely. Some large competitors refused to go along. Whirlpool saw some improvement in margins that were largely offset as its product mix turned negative and average pricing fell. This was a Leaders Trap.

Hertz and all of its competitors raised prices to sustain margins. This effort complemented the more important effort to reduce capacity and costs to a greater degree than demand fell. This was an example of a neutral price increase. We should note however that Enterprise continued to gain share on low prices as the industry recovered from the financial crisis. Enterprise is today’s dominant market leader in the industry.

Unilever had the best outcome. As demand fell, Unilever and all of its major competitors raised prices to maintain their margins. No one gained a price advantage, so no market share changed hands. Unilever and its competitors enjoy good pricing power.

So, when planning to raise prices, we have to ask ourselves whether the new price will enable any of our competitors to underprice us and take some of our share. If that is likely it is a bad pricing tactic. If all competitors are likely to follow us, it is a safe strategic move.

Of course, I have not discussed the pricing situation in which a leader decides to price below its key competitors. That is an aggressive pricing stance we have seen at one time or another in each of these industries. Consider the aggressive pricing of LG in large appliances, Enterprise in auto rentals and of Procter & Gamble in the disposable diaper business. Procter & Gamble used low prices to severely weaken the competitive capabilities of Price Leader Drypers. There are many other examples as well: the Koreans in automobiles; the Indians in pharmaceuticals; the Chinese in televisions; Google in office software; Microsoft with its Copilot product in AI, and many others.

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