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.
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:
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).
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.
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).
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.
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.
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.
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.
Maybe the most important aspect of the price increase process is the communication plan, not only to your customers, but also to your staff. In the many hundred pricing projects we have executed, I cannot remember a single company’s customer-facing staff who said their product or service was too cheap. So, before you communicate with customers, you need to communicate internally.
The method and channel for your internal communication is what works best in your company. It may be internal news letters or videos distributed on your internal network. For small companies, maybe a town hall style meeting or other ways that work for your circumstance.
This is what you need to communicate:
You need to say why you are preparing for this price increase and why you decided to do it now. This is very similar to how you plan to defend the increase to customers.
Since you have modeled the results of the price increase, you can now also say and show with graphics to your staff what the outcome of the increase will be. If the modeling shows there will be higher revenues, but lower sales, you need to alleviate the fear that some staff will have of losing their jobs (if you do not plan also to reduce staff). One way of alleviating this fear is explaining that your price increase will provide the company with more resources to market your product and/or services, so that after some time, you will see an increase in volume again.
Part of the communication needs to be an optimistic view of the future after the price increase. If you, as part of your preparation, did pricing research, you now know your marketplace better than before, and you can leverage that into more efficient marketing and sales messages that will drive a higher growth rate and higher profits. Your staff needs to know this.
Obviously your external communication plan needs to be different than your internal communication. It is essential that you have your staff communicating the message you decided on, also set the anticipation. Information is key in this step, because if you disgruntle your customers they will leave. So ensure you keep them informed and up to date with all the important dates and information.
Your sales people need to tell your customers, as part of their regular customer communication, that they hear that there will be a price increase some time in the future.
They should say they are not sure about when or how much. Before they communicate this with customers, they must have attended the training discussed earlier.
The company makes a formal announcement that a price increase will take place at a defined point in the future. How far in the future depends not only on the reordering frequency of your customers, but also on how long you can sustain your current prices. Three to six months in the future is typical, but we have worked with companies who say they need to give their customers longer notice.
In this formal communication, you need to remind your customers how long it was since the last time you increased prices.
If you can, and if it is relevant, you might want to say that over that period, the consumer price index increased by X% while you increased by 0%.
Also, if you can, you should also remind your customers about the products or services for which you do not plan to increase prices. You should also say that you are not passing all your cost increases onto your customers, just a portion of them.
Continue to remind your customers about the pending price increase – make sure it will not be a surprise for them.
Your sales people should offer customers to buy now at the current price for delivery after the price increase. How distant in the future they can schedule delivery depends on your business, but six months is often a good compromise.
As you get closer to that price increase date, make sure your sales people are communicating the option to buy now for delivery later.
Execute the price increase and communicate again to your customers about the increase. Remind them about the reasons and the times you communicated this in the past.
Inevitably, some of your customers will rebel, i.e., tell your sales people they will stop doing business with you. If the training and communication has worked as it should, most of those rebels will be taken care of and will realize that the value your company provides is worth the added price. However, for those who do not, there are really only two options:
1. You can grandfather in some of the rebels by offering them the old, lower price for orders they place a short period after the price increase is executed. Maybe for three or up to six months. After that, they too have to buy at the higher price.
2. You can simply drop them. Of all your customers, those who are the most price sensitive are also the customers who are the least loyal to you, and those who are often the most expensive to serve. In preparation for your price increase, I recommend you do a cost to serve analysis of your (main) customers so that if they are the rebels, you may take this as a reason for dropping them.
If everything else fails, and customers you really want to retain want to rebel and move the business you previously earned to a competitor, the final solution is un-bundling. What this means in this context is to keep a customer at the old, lower price, longer than others, while at the same time lowering your cost.
For example, if you sell hardware, maybe you sold the hardware including power cables. To unbundle for the “rebel” customers, remove the power cable (or decrease the warranty or increase the minimum order size, etc).
If you sell services, you have to find other ways of lowering your cost if the price is to stay the same. If, for example, an accounting firm provides an all-inclusive service to its customers, maybe personal retirement advice can be removed. Maybe tax preparation can be included, but tax advice not. A gym that sells monthly memberships can remove access to certain group training programs.
It all depends on your circumstance, your customers, and your company.
Having successfully executed a price increase process, you now must make price increases a annual, or bi-annual event. Make sure that your customers get used to a price increase every six or twelve months. The increases do not have to be large, often just a few percent, but compounded year after year, they will start making a real difference for your company.
It also means you do not have to go through a process like the one described here every time. Price increases becomes part of daily business life and not a disruption that challenges your entire company.
Atenga Insights is a fast-growing, global company that is challenging the pricing consulting industry. Using our unique proprietary PDA™ technology, we identify the price and positioning that will generate higher sales and profits for our clients.