How to Raise Prices
I recently fielded a question from a former client who was looking for advice on how to raise the price of a certain product. Preparing to launch a revolutionary new SaaS offering later this year, which we helped price, the tech company is also keeping an eye on its existing offerings and wants to make sure it isn’t leaving money on the table.
This is a type of email that I love getting. It’s always great to hear from companies and individuals we’ve worked with. It’s especially great when the email makes clear that they’ve continued to improve their pricing strategy since we worked together! It means that I did my job well.
The fact that the marketing manager who contacted me already knew she wanted to raise prices for an existing product, one that was not the focus of our project together, was a great sign.
With that said, raising prices, especially on existing customers, can be scary. I thought it would be useful to build out an article based on my conversation with this marketing manager. Hopefully it helps you in your own efforts.
Why to Raise Prices
Too often, we come across companies that simply haven’t touched prices in years. They like the prices they have, thank you very much, and at least as importantly, customers say that the company is already overpriced. Why rock the boat?
First, at the least, if your prices aren’t rising with inflation, you’ve been giving a discount this whole time. You just haven’t realized it yet.
Thankfully, inflation in the U.S. has been low. But if you don’t have mechanisms in place to readjust prices if and when inflation increases, you are unprepared. Companies in countries with less stable currencies, such as Colombia or Argentina, know this well.
Second, we typically find that companies are underpricing their offerings compared to the differential value provided. As we know, customers are unlikely to tell us that we’re a steal, so remember to take claims of being overpriced with a grain of salt. Such customers are the loudest but not necessarily the most representative.
That is one reason it is so essential to have a clear understanding, both qualitatively and quantitatively, of the value on the table of your offerings. It enables sales and marketing to have a clearer idea of where the company is and where you want to go.
(Importantly, as I tell in my book, The New Invisible Hand: Five Revolutions in the Digital Economy, some customers will actually thank you for raising your prices. Check out the story about how the founding CTO of Priceline.com found that out in practice. Your best customers want you to succeed.)
Third, especially in this case, raising the price of existing offerings was helpful from the point of view of the entire product portfolio and brand strategy. When the new SaaS offering hits the market, it will be an iPhone in a world of Nokias with the price to match. It can be confusing to customers for one company to offer both a premium suite and an existing me-too product. Raising the price of the existing product brings clarity to the portfolio.
How to Raise Prices
Of course, this doesn’t mean that a company can simply raise the price of a product and be done with it. We must move methodically and with careful consideration.
In my client’s case, they were already planning on introducing new functionality into the existing product. This is a great opportunity for them because they can tie the price increase to this increase in value. The company is giving more; the company can get more.
Such an opportunity isn’t always present, however. What if you don’t have such a product milestone to leverage?
There are advantages and disadvantages to introducing a significant price change all at once versus gradually over time. While the details are out of scope of this article, the best approach for a given situation will vary depending on many factors, such as the competitive environment, customer segmentation, market maturity, etc.
The best method for reducing customer resistance to a price increase is to tie it to the value provided. We’ve already established the criticality of understanding the value of your own offering. If you don’t understand it, how can your customers? How could you possibly communicate the value, let alone defend it?
Do your homework: understand your differential value offering.
A weaker method is to justify a price increase due to rising costs. Comcast just did this to me, letting me know that effective January 2020 my plan is increasing by $3 a month “as a result of changing business costs.”
While there is evidence from psychology that any justification is better than none, avoid pegging a price increase to cost. Why? From a value perspective, your customers aren’t responsible for your cost structure. The value I receive from Comcast doesn’t change due to their business costs, and their differential value to CenturyLink fiber optic hasn’t changed either. Plus, I’m getting a lot of special offers from CenturyLink right now urging me to switch providers.
You are likely to see some customer attrition from a price increase, although if you’re doing your job well, probably much less than you fear. This is especially true in B2B markets.
A volume hurdle calculation will give you a clear breakeven point as to the allowable volume loss to maintain the same profitability. Any loss smaller than the breakeven means that your price increase has raised profitability.
And in the end, so long as it is strategic and controllable, some attrition is fine. Your most price-conscious customers may drop off. Those are often your least valuable customers in the first place. Perhaps they have now enabled your sales team to spend their valuable time on customers who better understand the value provided. That sounds like a gift.
“Nothing happens in isolation. In isolation, nothing happens.”
– Tim J. Smith, PhD, Founder and CEO of Wiglaf Pricing
Recognize that static prices are dead prices. It takes time and effort for the rest to fall into place, but without the recognition that pricing is a continuous process, your company will lose ground to the competition and underserve its customers. Pricing is a verb, not a noun.
With a solid qualitative and quantitative understanding of your offerings, have the confidence to ask for your fair share of the value you’re creating.
You just might have some customers thank you.