In my December 16, 2013 post, Amazon: Pricing to Extinction?, I predicted that Amazon would be raising prices. I have to admit that the increase occurred earlier than I anticipated.
I would love to say that it was genius on my part, but the reality is that anyone looking at the numbers would have reached the same conclusion. A company cannot continue to:
- Lose money on billions of dollars in sales.
- Suffer 30% reductions in margin.
- Burn through two-thirds of its cash reserves.
- Take on billions of dollars in new debt.
without risking extinction. Jeff Bezos is too smart to let that happen.
What I want you to take away from this experience is that low-price strategies inevitably fail. At some point low-price strategies hit a wall. The obstacles these strategies run into are:
- Greater investments with diminishing cost-reduction benefits.
- Declining sales (if you reduce your price by 10% you must increase your customer base by more than 10% to continue to grow).
- Shrinking margins.
- Smaller cash reserves.
- A need for additional borrowing at a time when the company can ill afford it.
It’s at this point that the company must raise prices which, in turn, brings its own set of challenges. These challenges include:
- Convincing customers that there’s a good reason why they should pay more instead of searching for an alternative.
- Shift your customer’s focus from price to value (we know how most people respond to change).
- Shift your culture from a low-price mentality to a value mindset.
- CEOs face significant risk to their continued employment because their company’s revenue and profit numbers will initially decline during the transition.
- For business owners, these declining sales and profit numbers make their bankers jittery, putting the company at risk for getting additional, affordable funding.
- Shifting your company’s creative energies from cost savings to new product or service creation.
Given all of these challenges doesn’t it make sense to establish your business, your brand, as high value, premium price from day one? Do you really want to invest all that time and energy building your business on a low-price strategy only to have to abandon everything you’ve accomplished to start over again?
Predictable: Amazon’s Price Increase