Price Increases at the Time of a Sales Decline
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.