Perhaps You Should Raise Prices

The economy is showing signs of relative stability. The stock market is no longer going through wild swings. Banks are beginning to lend (at least a little). And the government is no longer talking about economic doomsday scenarios.

While that all sounds good, it doesn’t mean the recession is over. Analysts and economists say true economic recovery will not happen for another year, and even then it will be late 2010 before the average small to midsize business starts to feel the economic turnaround.

In the Channel Insider 2009 Market Pulse Report, solution providers said that their customers were cutting back on IT spending. Many end users were taking longer to act on IT projects or deferring work to avoid payments. Thirty-eight percent of surveyed solution providers said that their customers were demanding lower prices for products and services.

Business-technology consumers remain frugal about their IT investments and demand the best, most aggressive prices. But that doesn’t mean you have to give it to them. Supply-side economics, in which higher demand and lower availability equals higher prices, still applies no matter the economic climate.

Fortune Editor-at-Large Geoff Colvin offers a simple but effective formula for determining relative pricing for goods and services. It’s a two-dimensional grid in which the top is for unique goods and services, the left flank is for goods that are necessary, the right flank for discretionary purchases and the bottom for commodity goods.

In his column, Colvin recounts how some businesses use this grid to determine what goods cannot only withstand current pricing pressures, but also tolerate pricing increases. If something is both unique and necessary, such as toothpaste and gasoline, consumers will tolerate a price increase. However, if something is both commoditized and discretionary, such as common household appliances and air travel, consumers are less forgiving of price hikes.

For solution providers, this simple formula could provide some much needed directional guidance on how to price their goods and services. In fact, Colvin’s grid could give solution providers the ticket to raise their prices.

Consider this: One of the hottest technologies and services opportunities in the market today is virtualization and IT consolidation. End users are looking to reduce their data center footprint and the complexity of their IT infrastructure, while increasing the manageability and efficiency of their IT assets. According to the Microsoft 2009 SMB Insight Report, virtualization and IT consolidation are ranked as the best IT cost-saving investments and technology investments for business growth. If that’s the case, solution providers should be able to charge top dollar—or at least not waver on their rates—for virtualization products and consolidation services.

Conversely, investments in office productivity applications, such as Microsoft Office and Google Apps, are seen as low value to SMBs. Add to that the fact that you can buy productivity apps from anyone, implementation doesn’t require tremendous skill and that older versions work well enough that new versions aren’t necessary, and you’ve got a recipe for cutting prices.

What if something is unique, but discretionary in nature? Solution providers said in the Market Pulse report that their customers were looking for product sales and support services for smartphones, such as the iPhone and BlackBerry. While the devices are relatively high priced, they’re overdistributed. In this case, pricing should remain relatively flat.

How about unified communications? The number of vendors providing products and services in unified communications is still relatively small. The number of solution providers supporting unified communications is limited. But many businesses—especially those smaller than enterprise—are not looking to consolidate voice, data and video communications just yet. Therefore, unified communications falls into the unique but discretionary category.

Ah, but security and storage are imperatives. No one told data that there’s a recession, so it just keeps growing exponentially. No one told viruses and hackers that there’s a recession, and the volume and severity of threats is skyrocketing. Yet, both security and storage, according to the Microsoft SMB report, are seen as low value for controlling costs and advancing business interests. Given the general availability of security and storage solutions—such as anti-virus, firewalls and backup management applications—these technologies fall into the necessary but commodity category and likely will feel pricing pressures.

It’s easy to simply capitulate to customer demands for lower prices. However, it’s hard to raise prices once you’ve lowered them. While Colvin’s formula is not precise and cannot account for all product pricing, it does provide some rudimentary guidance for solution providers to respond to customer demands for “aggressive” discounts and price cuts.

Lawrence M. Walsh is vice president and group publisher of Channel Insider.

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