“But if we raise prices, we’ll lose volume.” If I had a nickel for every time I heard this from a business leader or salesperson, I’d have a castle of nickels. I’m about to take on the entire economics profession. Buckle up.
Economics teaches the law of demand:
- When price goes up, volume goes down.
- When price goes down, volume goes up.
Simple? Yes. A universal truth? Nope. But this so-called law is so entrenched in our systems, academics, literature, and psyches that the Concise Encyclopedia of Economics calls it “most famous law in economics, and the one that economists are most sure of. On this law is built almost the whole edifice of economics.”
Almost the whole edifice? Yikes.
This single economic axiom and its famous twin, the demand curve, have done more damage to pricing execution than any other economic principle.
I’m not saying the demand curve is a liar, but it definitely exaggerates.
Why do I find fault with the infatuation with the law of demand?
- There are many exceptions to the law of demand, as you can find in a two-minute Google search. I wrote about one of these, the Price-Quality Effect in my last post.
- The source of this law and the bulk of the research focuses on consumer goods, leaving out consumer services and the entire B2B world.
- This law rests on an important assumption – five beautiful, impossible words: “All other things being equal…”
This last one is the key to my objection. What, apart from price, must be held constant for this law to apply? All things. All of them. This means:
- No changes in the preferences, needs, standards, goals, circumstances, budget, or behavior of individual buyers, nor in the collection of buyers as a whole market.
- No differences whatsoever in quality, service, speed, availability, responsiveness, convenience, or utility of products and services available in the market (including you and all of your competitors).
- No innovation in the products, services, or systems across the entire market.
- No impact from fiscal policies or government regulations and no changes in the economy.
In short, the law of demand assumes that the entire world is perfectly static, operating as a commercially sterile laboratory for you to decipher your price elasticity. All of these assumptions are invalid in the real world.
What’s the problem with unquestioning belief in the infallibility of this law? Companies undercharge all over the place because of phantom fears of volume loss. It’s holding you back from earning higher prices for the excellence of your products and services.
You can test this with marginal price increases in a low-risk area of your business. You’ll find that this “law” is more of a loose guideline with a lot of wiggle room than an unerring truth. Let me know what happens.