For billionaire investor Warren Buffett, the most important thing he cares about in a business is its "pricing ability." "If your company can raise prices without losing market share to competitors, that means you have a good business," he says. "And if you have to pray before raising prices by 10%, your company is doing terribly."
The good news is, your business may possess some degree of "price-setting power" in the market. There are strategies you can use to minimize the impact of price increases on your customers and to ensure they remain loyal. So, if you still have to pray every time you raise prices, don't worry: we'll look at some strategies below.
Raising prices isn't a common practice in business, and of course, it always comes with the risk of losing some customers. But you don't need to be afraid of raising prices. Here's a guide on how to communicate price changes to customers in a way that they understand and accept:
1. Explain, but don't apologize.
The most important thing is to clarify the price increase and provide a reason to the customer.
Raising prices is "bad news," and you might be advised not to mention it and hope no one notices. And indeed, for some types of businesses, this can be effective. For a retail store like a coffee shop or clothing store, there's no need to strategize about announcing that you've raised prices.
But for a business with a large base of regular customers, most of them will eventually realize the problem, sooner or later, and they will feel cheated when they find out.
Therefore, in this case, when announcing a price increase, provide a plausible reason. However, don't apologize or blame circumstances. Instead, announce it with a positive attitude and show customers why the price increase is reasonable and fair.
For example, your business might be forced to raise product prices due to increased raw material costs. When informing customers, blaming the price increase on raw materials might sound plausible, but it's not a good strategy, according to sales expert Grant Cardone.
"Don't blame inflation," he wrote in an article in Entrepreneur magazine. "Instead, increase the value of your product."
We'll cover how to convey value in the following steps, but the key isn't to apologize or play blame games. You can mention the cost increase, but in a more positive way. Here's an example of a magazine raising its online subscription fee:
“Our operating costs have increased by 20% over the past year, so we need to implement some minor changes to our pricing strategy. However, we want to continue providing our customers with great value. Therefore, with the new monthly subscription fee, you will enjoy… (list some services and benefits that might make customers feel this is a good deal).”
2. Talk about your values.
It's true that most customers are price-sensitive, but the majority don't buy based solely on price. Many people will stick with you if they appreciate your product or service. So, take this opportunity to raise prices and remind customers of what they have received, are receiving, and will receive from you.
“Communicate the core value of your product/solution in your price increase announcement, and make sure they remember the unique aspects of your solution rather than your competitors,” blogger Lisa Singer wrote. “For example, highlight some key benefits you’ve offered customers over the years (be specific), and clearly explain how the price increase will support your company’s goal of solving customer problems in the years to come.”
Consider offering customers a complimentary product/service, or improving your existing product. It's uncomfortable to pay more for the same item. However, if you offer additional benefits or services when customers make a purchase, the price increase will be more readily accepted. For a product, you could add features, extend the warranty, or include other incentives that make customers feel they're getting more than they already had.
3. Treat loyal customers fairly.
Raising prices is especially difficult when you're running a business with a monthly subscription model (like magazines, telecommunications, etc.). Because these regular customers have spent a lot of time using your products/services, they usually expect prices to remain the same. When announcing a price increase, the most effective solution is to prioritize long-term customers first.
Back in 2010, the online payment company Chargify abruptly switched from a freemium model (free for basic services, charging for premium services) to a monthly subscription model. Around the same time, the company increased its monthly membership fees.
Customers reacted fiercely: the company was flooded with angry emails, complaints on Twitter and TechCrunch, and even appeared on the front page of Hacker News.
Even if the company's price increase is justified, many customers still feel cheated. One commenter said, "...We assumed accounts would be free until this startup became significantly more successful." Another said, "Today you (Chargify) turned your back on us and told everyone that we don't matter to you."
The problem was that Chargify failed to account for a loyalty program for its existing customers. Often, business leaders develop their companies with pricing models they believe will never change, and then suddenly prices increase significantly. Faced with this backlash, the company is forced to offer lower prices to loyal customers.
Chargify weathered this public outcry and has since grown steadily. If you want to avoid offending customers, a smart strategy is to offer special privileges to existing regular customers.
For example, you made a sensational announcement about charging only $9.99 a month for the service, but then you decide you need to charge $19.99. First, continue charging existing customers the original price, and only apply the higher price to new customers. Or, if you want to charge everyone $19.99, at least provide incentives (gifts, complimentary services) or discounts for loyal customers.
4. Media, media, media
Whether it's through social media, on forums, or right in the store, things can easily spiral out of control if customers are unhappy.
Therefore, you will need a detailed, comprehensive communication plan to ensure that you are able to observe and grasp everything.
Start raising prices by contacting key customers first, before making a public announcement. Try to meet in person, as it will be more personal, and you'll have time to explain and answer any questions they may have.
Then, before you announce it externally, you'll need to disseminate the news about the price increase internally to ensure everyone understands the change and is prepared to discuss it with outsiders. This is especially important for sales staff and those in positions requiring frequent customer interaction. You might even want to provide them with some "sample scripts" to help them articulate the new pricing structure smoothly; but don't forget to tell other staff members. You never know who your customers will be talking to, and it's crucial to be prepared.
Next, you need to make a general announcement, sending an email or letter to all your customers at once, and possibly posting it on your blog (if you have one).
Timing is also a crucial factor here. Make sure you provide ample notice before the actual price increase takes effect. There are two reasons for this:
1. Give people time to prepare for price changes and plan for alternatives if needed.
2. People tend to be more upset about things happening now than about a negative event that might happen in the future, so give them time.
Once your communication plan is complete, be prepared to answer a barrage of questions, both via email and phone, and on social media. You may not want to spend time on comments on Twitter or other platforms, but if you leave them unanswered, you'll not only make customers feel neglected, but you'll also give others a chance to comment and express their dissatisfaction.
Communicate the information clearly and promptly. While this may not lead to acceptance of the new price by everyone, it will at least make them feel they are being treated fairly.
5. Offer a wide variety of choices.
The best way to reassure customers about price increases is to offer them more options.
In the previous example, when you increase the service price from $9.99 to $19.99 per month, you should design a service package with fewer options, and charge the old price of $9.99. For example, customers who buy the $9.99 package only receive service during business hours, while those who buy the $19.99 package receive 24/24 support. This way, customers with limited budgets can still continue to use your service. You could even add more options for customers with a premium service package.
Even if they don't need these options, offering multiple choices helps you redefine the value of your core product/service. According to the author of "The Psychology of Pricing," using price anchoring makes your price much more attractive. What is price anchoring? For example, you're selling a used car for 300 million VND. According to psychological theories, the human mind is easily influenced by the first piece of information it receives (the anchor) in the decision-making process, in this case, the price of 300 million. So, when negotiating, if you agree to sell the car for 270 million, the customer will consider it a reasonable price (because it's lower than 300 million), even though in reality, your car isn't even worth 270 million!
Therefore, instead of doubling the current price and asking customers to accept the new price, offer them several different options. This way, customers are less likely to directly compare your old and new prices. They will weigh the new price against the options you offer, so focus on the value of each product/service package you provide.
6. Next steps
As you've seen in this guide, there are many ways to increase prices and minimize the impact on your customers. A communication strategy is key to success, but offering customers multiple options, talking about the value you provide, and presenting the issue with a confident, assertive rather than apologetic voice are equally important.
The next step is to take action. Develop a suitable pricing strategy for your business, and then start creating and implementing a marketing plan.
Nobody likes talking about prices, and it's normal to worry about telling customers, "We're going to raise prices." But struggling to keep prices low is even worse. Doing so means you'll be cutting corners on your offerings, or even going bankrupt. And that's clearly not good for either you or your customers.
Source: Saga.vn
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