Inflation is coming. It drives your costs up and results in lower profit margins unless you raise prices. But customers hate price increases and they hate having to pay more.
How can your company increase prices and upset your customers the least? Here are six methods to explore.
1. Cut variable costs.
Is there a way to reduce the costs of your product without significantly affecting your customers’ perception of the product? This is extremely common in the packaged food industry. What used to be 28 ounces of Prego spaghetti sauce is now 26 ounces. A package of Rolos used to have 11 chocolate caramel chews. Now there are 10. What looks like a half-gallon (64 oz.) of Breyer’s ice cream is now 48 ounces. Customers quickly recognize price increases, but they are slower to recognize reductions in product quantity, especially when the size of the packaging remains the same.
2. De-bundle.
Look for something that costs you money that you can de-bundle from the purchase. Customers who want the de-bundled feature will pay extra for it, and it allows you to maintain or lower prices for customers who don’t use the de-bundled feature. At the worst, you’ve only raised prices on some of your customers.
A recent example is how some airlines have de-bundled checked luggage so they now charge customers for checking bags. Although many people saw this as a price increase, it would have been more readily accepted by their customers had they announced they were simultaneously lowering the prices of their flights for people who don’t check bags.
3. Introduce new products.
It’s possible to create a new but similar product with a slightly different feature set. Charge more for the new product and attempt to move as many customers as possible to the new product. Of course, this also means you need to build some added value into the new product.
4. Raise fees.
When gas prices hit $4 per gallon, many companies added a fuel surcharge to their bill. This extra fee isn’t looked at as a price increase, but rather just a way of passing some cost increases through. Now, four years later, some vendors have not removed this fuel surcharge even through fuel prices are back to normal. Many customers do not consider fees when making purchase decisions, so raising fees is preferable to simply raising prices.
5. Raise prices on select segments.
You’ve considered the first four options and they don’t completely solve your pricing issue, so you have to raise prices. Consider only raising prices on select customers. First, look to raise prices on your least preferred customers, those you wouldn’t be too upset to lose. These could be the ones who are expensive to service or are just a pain to deal with. They could also be the ones who negotiated the best deals, so they may not even be profitable after your costs increase. Then look to increase prices on new customers. The advantage here is that new customers don’t recognize price increases. They only see the new price. Do your best to hold prices level for your best existing customers.
6. Raise prices with a purpose.
If you’ve come to the conclusion that you have no choice but to actually increase prices, at least blame inflation. Customers may become very angry if they believe you’re raising prices to increase your profit at their expense; however, they are more accepting if they believe you are simply passing on costs. Apologize to your customers for your price increase, but explain how your costs are going up and that you have no choice. Look and act contrite. Do something nice for them, such as giving them a limited time coupon for a discount to the old price.
Mark Stiving is a pricing expert with a Ph.D. in marketing from U.C. Berkeley and more than 15 years of experience helping companies implement value-based pricing strategies to increase profits. A speaker, coach and consultant, Stiving has worked with esteemed companies such as Cisco, Procter & Gamble, Grimes Aerospace, Rogers Corp., as well as many small businesses and entrepreneurial ventures. Read more from Stiving on his blog at www.PragmaticPricing.com, and learn more at www.markstiving.com.
