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Markets may or may not bear price increases related to companies' surging energy costs. Time for some sharp study — or creative thinking.
Josh Hyatt, CFO Magazine
July 15, 2008
With oil prices soaring, when can companies pass those higher costs on to customers? It's not an easy decision; even as they adjust to paying a premium for regular, consumers won't necessarily accept other price hikes.
"Your customers don't care how much your expenses have gone up," warns Rafi Mohammed, author of The Art of Pricing. "They may have a maximum they are willing to pay, no matter what." Studying data from past price boosts may provide clues. Another approach: conduct regional price tests to identify the tipping point at which demand is affected.
But even as he sounds a note of caution, Mohammed also says that "under the guise of oil costs, companies can raise prices by more than they might think." In June, Dow Chemical raised prices 25 percent across the board, citing rising energy and commodity costs.
Either way, it's crucial that companies design a proper communications strategy around price increases. In April two major cruise lines agreed to refund tens of millions of dollars' worth of fuel surcharges to passengers who had purchased tickets prior to the surcharges going into effect, after hundreds of people complained. Water Transportation Alternatives Inc., which owns 15 tourist and commuter boats, primarily in the Boston area, took a different tack. Signage indicates that the company reserves the right to add a fuel surcharge, but so far it has managed to hold off, in part by encouraging boat captains to compete on fuel economy. That has lead to a 15 percent reduction in fuel consumed, saving the company $350,000. The contest prize? A $50 gift certificate for — what else? — gasoline.