How to increase your prices - Full pricing guide
The right pricing is a question many business struggle with, and pricing “right” is often both the quickest and most effective way to improve both sales and profits.
Follow our 7 step guide on how to successfully increase your prices and increase your business profitability.
Challenges with setting a higher price
In some markets, increasing prices is easy, in other markets it is not. We are all familiar with how consumer goods companies always change their prices. This is particularly pronounced for online retailers, where changing prices is free, and the results in sales levels can be immediately measured. In fact, many online retailers continually change their prices in order to automatically measure what customers are willing to pay for a product and to measure price elasticity.
However, if your company primarily sells in traditional ways with sales people and/or from a catalog, or if you sell in a B2B market, you are among the vast majority of companies for whom price changes, in particular price increases, cannot always be taken lightly. But for all companies in the above example do not know their customers ‘willingness to pay’ and their true pricing power.
Many executives are uncertain about the results of a price increase. Some questions they ponder on are:
- Will I lose my best customers?
- Will I see an immediate drop in sales? Will I tarnish my brand?
- Will I see customers flee to competition?
These are all questions that can be mitigated by a proper pricing strategy.
The 7 step process of increase prices
1. Decide which product or service price should increase
2. Decide for each of these product(s) how much the increase should be
3. Model the expected results using price elasticity data (from sales transition analysis, pricing research, or, ideally, from both).
4. Plan and define how you are going to defend and justify the increase for your repeat customers
5. Develop and implement a communication plan
6. Train your customer-facing staff on how to defend and justify the price increase
7. Develop contingency plans for cases in which customers do not accept the price increase and want to rebel
1. Deciding which product or service you should increase
It may be obvious that you want to increase prices on the products or services for which the margin is lowest, but it may not always be that simple. There is an idea in measuring the willingness to pay for a product or service that you believe can take a large market share. Or perhaps you are considering entering a completely new market; whether that is through an entering a new country or region, or targeting a new customer segment. The first step is to consider your short term goals (which obviously should align with your long term goals).
2. Decide for each of these product(s) how much the increase should be
Once you have considered what product or service you would like to measure, you’ll have to consider your sale frequency. An easy differentiation is to appraise the amount of products or services; the SKUs, your business offers.
Companies with many SKUs:
If your company has many SKUs with a high frequency of sales, your sales data will allow you to identify the products’ price elasticity (how much sales volume would change as prices change) and coefficient of determination (how much “price” as one of the attributes of the product affects the customer’s buying decision).
- If the coefficient of determination is high, it means that you have little wiggle room, and you know that you will see significant volume changes also for small price changes.
- Price elasticity will tell you how much of change you will see for any given change in price.
- Your sales data will also tell you the halo effect of your products, a measure of which products drive sales of other products.
Armed with this and margin data, you and your team can assess the best SKUs for price increases, and the level of those increases. You can assess the SKUs for which the increase will have the most impact on revenues, where the sales level will be impacted the least, and where the halo effect can be maximized.
Companies with few SKUs:
For companies with relatively-few products or services, especially when those products or services are sold relatively-infrequently, sales transaction data analysis will not provide accurate modeling data.
Instead, in cases like these, pricing research is the answer. Pricing research also measures price elasticity, willingness to pay, and willingness to buy by investigating your marketplace. The “marketplace” means your customers and people and companies who are not your customers. In addition, it measures how value messages and your particular differentiators affect willingness to buy and to pay.
It will help you to understand customers’ willingness to pay and willingness to buy at different price levels, and understand price elasticity and cross price elasticity (a measure of how buyers migrate their purchases among the choices they have based on the price changes of those choices).
Once you have this data, you can easily predict the results of a price increase and you can make the trade-offs (if any) between sales volume and revenue that are right for your company.
Concluding on how much you should increase your price.
It is paramount that the price increase is based on data from your own company or from the marketplace. When price increases are based on data, you will be confident that you are making the right decision for your company and for your particular situation.
Case Study
A global services organization selling annual subscriptions had resisted a price increase for nine years. The reason was that last time they increased prices, they got a severe rebellion from their members. It was not that many people cancelled their subscriptions, because the company does provide real value to its subscribers, but more that middle and upper management received a flurry of really nasty phone calls, letters, and emails.
The company had been absorbing cost increases and holding off another price increase until it was almost too late, because it didn’t want to go through that same painful process again.
Pricing research showed that the company now could increase prices by 25% with a modest decline in subscriptions. The research also measured the monetary benefits the subscribers received from being a subscriber.
Not only was Atenga Insights able to recommend new prices, but armed with the information collected in the pricing research, we conducted, we also helped the company develop its communication plan around the actual Return On Investments subscribers enjoyed in return for its membership fees.
The results were the largest one-time subscription increase with the lowest ever subscriber pushback, a happy Atenga Insights customer, and happy company subscribers.
3. Model the expected results using price elasticity data (from sales transition analysis, pricing research, or, ideally, from both).
Sometimes, you’ll need to present your arguments for increasing prices, we will get more into that in the next section. But before you sit down and justify your price increase you will need to do some calculations.
The easiest way is of course to show a ROI calculation. However, if you haven’t done a proper pricing research this is tricky to get right, because then you don’t know what the new optimal price is. But whether you have or you haven’t completed your pricing research, you can pop your numbers into this table below.
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Example
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Assumption
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Result
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|---|---|---|
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Price increase from $XXX to $XXX
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$XXX
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|
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X amount of customers
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$XXX
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$XXX
|
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X months
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$XXX
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$XXX
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|
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- $XXX
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|
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Result
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= $XXX
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4. Plan and define how you are going to defend and justify the increase for your repeat customers
Some of your customers will simply accept the price increase. Many will not even notice. Inevitably, however, some will not accept it, and will challenge you and your company. They will threaten to stop doing business with you and to threaten take their business somewhere else. For that reason, it is imperative that you can justify your price increase to these customers. These are the ways you can justify your price increase:
No increase for years:
Because it is likely true, you have to accurately say to the customer that for (years), you have assumed your cost increases and not passed them on to your customers. Tell them that you worked diligently to make your operation as effective as possible to avoid price increases, but it does not work any more. You cannot assume more of your cost increases, and have to pass through a portion, but not all, of that cost to your customers.
Switching cost:
There will always be some cost for your customer to switch from your product or service to some alternative. From a hard cost point of view, these may include the cost of certifying a new vendor, train their staff on the use of the new vendor, and setting up new purchase and support procedures. Maybe your customer has inventory of spares that will become obsolete if they switches vendors. From a soft point of view, there is a cost to establish new personal connections and develop confidence in the new vendor, which your customer already has with you.
Maybe your customer resells your product in some fashion. There will then be the added cost for them to convince their customers to accept the vendor change. There may even be associated certification costs. As you prepare to justify your new pricing strategy, you need to do your best to quantify these costs and remind your customers about them.
They buy from you for a reason:
There are aspects of your product, your services, and your company that are more appealing to your customers than aspects of your competitors’ products, services, or company. That is why your customer is your customer and not your competitor’s customer.
It is paramount that you understand what makes your customers your customers. If you do pricing research, it will tell you what your customers (and your non-customers) really see as your particular completive strengths (as opposed to what they might tell you). This information must be used to remind your customer why he is yours. They buy from you for a reason, and should continue to do so.
ROI story:
Maybe your product or service provides actual income for your customer. If so, there might be an ROI story to tell. If there is, it needs to be a cornerstone of your communication.
Small portion of the overall cost:
If you sell a component into a large system, the price increase of your part is likely to be small compared to all the other components of the system. Find out how much, and contrast your increase with the overall cost of the system into which it goes.
Your competitors too:
This is the real kicker. Most companies in an industry have a similar cost base. This means that if you feel you are forced to increase prices, it is most likely your competitors will too – maybe six or twelve months after you increase prices. Remind your customer about this in the context of all the other reasons for the price increase. Imply that even if they change to one of your competitors, it is highly likely that the competitor will increase prices in the next few months.
Train your staff:
Paramount for a successful price increase is that your customer-facing employees and executives must be properly trained to deliver these messages.
In preparation for this training, you must try to understand every possible objection a customer will come up with, and arm your customer-facing employees and executives to deliver a convincing, succinct, believable answer for each.
Appropriate staff needs to receive detailed and comprehensive training on how to deliver these price justifications. Preferably, this will include a lot of role play.