The price trap is when a business relies on increasing price to grow revenue and that keeps it from innovating.
The math usually says it makes sense to raise prices because the higher revenue from charging all the remaining demand more is greater than the revenue lost from customers buying less.
Since this grows revenue and earnings more reliably than innovation, leaders come to rely on it and not think too hard about why their approach to innovation and product development isn’t contributing to results.
Price is often used to cover the costs of their flops, too. So, customers end up paying more to help cover for leadership’s ability to add real value.
That’s not how it should work. Innovation winners should pay for the flops. If a company raises prices to cover that, that’s a sure sign it needs to take an honest look at its innovation approach.
But, they won’t. Price is keeping them in the game. Companies stuck in the price trap can get 5-10 years down the road without solid innovations and find their products are suddenly losing relevancy against competitors and substitutes because leaders have not kept the product portfolio evolving with the tastes and preferences of customers, while the rest of the market has been.
Managers and employees will blame high prices for the businesses results, instead of the long period without meaningful innovation and product development, which is the real cause.
The price trap isn’t directly the fault of leaders who don’t know how to innovate. I blame Board of Directors who don’t know how to hire leaders who know how to innovate.
When a company is stuck in a price trap, leadership often changes because the Board does get a sense that there’s something wrong about relying on price to drive business results.
But, the Board doesn’t understand the root problem, so they replace leaders with the same type of leaders who don’t know how to innovate and keep the company stuck in the price trap.
These candidates look good on paper. They have polished resumes, have increasing responsibility in their carreer, happened to be at places that had some notable wins and can talk a good game.
From the Board of Directors point of view, they are low risk hires. If things don’t work out, ah shucks, what could they do? He or she was a solid candidate on paper.
Well, here’s one thing they could have done. The could have asked candidates what their innovation track records are and how they went about getting those results?
As for evaluating their answers, that’s for another post.