Rõtov: businessmen, don't be afraid to raise prices!
18.08.2010, 15:36The following is a column written in today's Äripäev by Igor Rõtov, chairman of the management board of Äripäev.
I have deep respect for businessmen who, in spite of stinging public contempt, have started to raise prices of their products or services. It is entirely natural for domestic players affected by the economic crisis to start increasing their profits after the slump and raise capital for new investments.
Be honest and say that you want to increase your turnover and profit, there is nothing to be ashamed of. The economic recession and the euro adoption have created a sentiment that any price raise is a demon scheme. As soon as someone mentions a possible price raise, there comes the media steamroller and flattens him. Without making a difference whether the prices are being jerked up by monopolies or cartels because companies increasing prices in a market of cutthroat competition get a similar public scathing.
Don't get me wrong - state control and public contempt is justified if prices are being raised by monopolies or market leaders, such as water companies or power producers. Market players who among themselves agree to raise prices deserve to be condemned and should be sanctioned criminally.
But in all other cases a price raise is nothing criminal or condemnable. Thank God most of the companies still operate in free competition and they are right to establish their prices as they see fit.
I also respect the businessmen who during the crisis managed to rapidly get costs under control, cut jobs and reduce wages, restructure operations and survive. Now the survival course is over and it's the time for business as usual.
Economy minister Juhan Parts warns companies who dare to raise prices and says that in many sectors prices are going up without a raise in productivity. I can't agree with that since in the domestic market it is often the price that determines the productivity.
For instance, Mati Feldman who is editor-in-chief of Inseneeria, recently in his column compared the productivity of hairdressers in Finland, Somalia and Estonia. Since the end-result, the hairdo, is the same in all the three countries, the real measure of productivity is the price.
If Parts says that price stability is the key question in the Estonian economy, I could not agree more, but what about a hairdresser who has to accept a salary that is several times lower than his colleague 80 km away in Helsinki earns?
Fortunately, Parts is not in the position to dictate prices to businessmen. And the latter when they are setting prices are under no obligation to consider the impact of prices on the inflation and macroeconomics.
The only objective for the business is to find a price for his product or service that ensures the best outcome on the turnover and profit line.
Great if they succeed and, in the process, manage to increase sales, achieve a nice profit margin and a fat dividend since it shows that they have been better than competitors.
Consumers should not be afraid of price rise. Unemployment remains high and wages are unlikely to go up any time soon. The domestic market will remain extremely price-sensitive which makes it very difficult to raise prices. Only companies that offer something very valuable can afford to do it. And others will have an opportunity to sell cheaper, but more.
Overall, let us now declare this recession over and enjoy the daily challenges of the market economy. And, dear businessmen, don't do the mistake of Arnold Kimber, head of the Estonian Association of Bakeries. Remember, don't agree price raise in advance with competitors or seem to have done so. Also, don't justify a price raise with world markets or need to raise wages of bakers. Be honest and say that your only objective is to increase your sales and profit, it's nothing to be ashamed of.
Be bold when you raise your prices! And remember, barking dogs don't bite!