Friday, February 27, 2009
Colvin on Raising Prices During a Recession
Can your firm afford to raise prices during this economic downturn? That is the question that Geoffrey Colvin tries to answer in his column in this week's issue of Fortune magazine. Colvin offers a simple two-by-two matrix for classifying products. One axis classifies goods in terms of high or low product differentiation. The second axis classifies products as either necessities or discretionary purchases. Colvin argues that products that are both highly necessary as well as highly differentiated have the most potential to raise prices during the downturn. For instance, he cites products such as Colgate toothpaste or Gillette razor blades. What is the worst situation in which firms may find themselves? If a company offers a commodity product that is a discretionary purchase, they are likely to suffer greatly during the recession, and they will virtually no power to raise prices. For instance, airlines sit in this quadrant of the two-by-two matrix. I think this simple two-dimensional matrix offers a useful way for thinking about how the downturn may affect your firm.