KNOWING WHEN IT’S TIME TO RAISE PRICES

During a recent visit to Florida, I had the opportunity to spend a day at Disney World. I was astounded by the admission price! Shortly after my visit I had the opportunity to visit with a friend who once worked in marketing for Disney. I felt I had to ask how the admission prices were established and was astounded by the answer, as you may be...

My friend confided in me that Disney's practice for several years had been to raise admission prices until they saw that the number of admissions dropped by 10%, at which point they would leave the admission price until the numbers of admissions recovered. Following the point at which admissions had recovered to their previous numbers, Disney waited for a period of six months and began the process again. Reacting just as a contractor would, I asked my friend what possible relationship there could be between gate prices at Disney World and the costs of running the park. His simple response..."None".

Days after my discussion with my friend, when my initial shock had worn off, I began to realize that Disney was solving a number of potential problems using this method. It also dawned on me that there was something contractors could learn from the Disney approach.

You will agree with me, I'm certain, that one of the problems Disney continuously faces results from overcrowding. They have learned that short of cutting off admissions at a certain level (which they do on occasion), raising prices is an effective way to slow down traffic at the gate. Another problem which Disney has to face is that of staffing. If there were wild swings between busy days and slow days, the park management might find itself wasting time and energy hiring and training new people to cover the anticipated large admission days, only to lay them off or assign them to part-time on slow days, possibly risking the loss of their investment in time and energy if those employees quit. Perhaps with all the experience Disney has accumulated running their service business they have realized that they do best when they target and control the volume of service they provide. Under certain economic conditions I'm sure that the Disney people find that admission falls even without their upward pricing spiral. If such a trend becomes apparent I'm sure that Disney would not be hesitant to lower prices to stimulate gate admissions.

Now let's put our contractor's caps back on and see what we can learn from the practices at Disney World. In today’s economic climate as contractors we might find it necessary to slow down the orders for new work, just as Disney finds it necessary to slow down admissions. If we simply decide that we are not taking any more business without considering how we could create less demand for our service, we may be losing out on profits, just as Disney must when they cut off gate admissions on a certain day. The preferred method of control for Disney is to have a pricing strategy which discourages some people from attending, but allows those who are not sensitive to price to attend. If we apply this strategy to the contracting business it might look something like this:

Assume that we normally carry a six week backlog of work. If that backlog grows to eight weeks we might find ourselves looking for more help, an almost impossible order in today's market. To avoid the prospect of having to hire and train more people we could raise our prices by 15% perhaps and see if that creates an alternative solution to our problem. The solution would be a slight drop in orders which would mean that our backlog starts to shrink. Contractors who have experimented with this approach often find that raising prices one notch does not accomplish their goal, some have to repeat the process by raising the prices another notch. The goal is to eventually find the price level at which you can maintain a comfortable backlog of work and avoid the wild fluctuations or run-away growth conditions have inherent problems. Should conditions dictate, a reversal of the process could stimulate the growth of our backlog as we open the gates again to those customers who are more price sensitive.