Why slashing product prices is usually a terrible idea
Warren Buffett is an aggressive pricer. He mostly leaves the managers of Berkshire Hathaway’s portfolio companies alone, but when it comes to setting prices at companies including See’s Candies and the Buffalo News, he has often liked to be involved.
“The manager has just one business,” he once explained to Fortune. “His equation tells him that if he prices a little too low, it’s not that serious. But if he prices too high, he sees himself screwing up the only thing in his life.” Such excessive risk aversion leaves money on the table, Buffett figures, so he often pushes for higher prices. More often than not, he’s right.
Even in a historic downturn, Buffett’s instinct is worth keeping in mind. Many managers underestimate the power of pricing, and the unanimous advice from pricing experts in this troubled economy is to price with courage and creativity. In businesses where demand has plunged, slashing prices may be a terrible idea—and it may not be necessary at all.
In a few special cases—think hand sanitizer—the pandemic has turbocharged demand. Yet even here, managers need courage. It’s the courage to abstain from multiplying prices by five or 10 or 20, or whatever the market will bear. The winners will be those who think long-term, difficult as that is in a crisis.
For the vast majority of businesses—those facing strapped customers and shrunken demand—the No. 1 imperative is to avoid cutting prices if at all possible, what experts in the field call “maintaining price integrity.” In the B2B world, “you get a lot of pressure back from your customers to reduce price, which can manifest itself as hesitancy to move forward with the purchase,” says Ron Kermisch, a Bain consultant who leads the firm’s global pricing practice. “Companies too quickly move to price as the lever, without really understanding what’s driving the customer hesitancy.”