6 Jun 2011

How (and why) to raise prices

I hosted a table at GWI's Berlin event to discuss "the politics of raising prices." We had a lot of interested people, and agreed on a number of good ideas for explaining why prices should rise (to cover higher operating, capital or scarcity costs). Among them were:
  • Convince people that "this time is different."
  • Get all stakeholders in the room to reconcile demand and supply, revenue and costs.
  • Advertise so that people understand the changes in demand and supply.
  • Base prices on an objective index (free of political interference) that addresses costs and scarcity
  • Set high prices and rebate excesses (water misers will vote for rebates!)
Got other ideas?

One of the more-interesting stories came from an engineer working in Saudi Arabia. He said that prices in Riyadh were only a few cents per cubic meter for water (a subsidy of over 90 percent). Low prices meant the government had to subsidize the system, but high water demand exceeded supply. Their solution was to supply water for one day in four or five (Jeddah is one day in nine!). This method of "preventing" shortage is harmful for equipment and inconvenient for customers who need to use water tanks during service cuts.

Riyadh is the capital city of nearly 5 million people in a country with a per capita income of $16,000, but it's crippled by this policy.

Bottom Line: Poor water management wastes time, money and water. Better to have fair prices that cover service costs and prevent shortages.