How to do Price Increases Without Losing Customers
It is possible to price increases without losing customers; however, you’ll never know until you do. When was the last time you raised prices? It is one of the first questions I ask new clients, and it’s shocking to say they have to think about it, but they don’t have to think of why they don’t. Due to inflation and the cost of living, business owners should price increases annually. When you raise your prices, these seven keys will help avoid customer loss and dissatisfaction.
Is it time to raise prices? It depends.
The ability to pass on a price increase is highly variable based on the industry and nature of the client relationship. Yet, there may be some businesses, conditioned by 20 years of low inflation and price sensitivity, who are leaving money on the table. Here are some tips for passing on price increases:
Rationalize your business case.
Many clients will arbitrarily oppose price increases, and data will disarm clients who resist solely because they don’t want to pay more. It’s hard to argue with evidence that raw materials and labor are more expensive than they were before. Highlighting features and benefits you’ve added cover professional procurement and buyers who view controlling costs as their purpose in life.
In consumer-packaged goods, providers often reduce size or pack-out instead of raising case costs. While this can be viewed as gamesmanship, reducing sizes is one way to cut costs without raising prices. This tactic is particularly effective if a provider can make a case that sizing results in waste or underutilization.
Providers can also offer price tiers, as commonly used in good/better/best models. By moving to tiers, some customers may reduce the service burden from your company by moving to a lower one, which could be advantageous.
Another option is to soften the blow of a price increase by enrolling clients in a VIP program based on their purchases and performance. You can rebate back to the client at the end of the year by achieving specific benchmarks, reducing your total cost to serve them. Clients may be willing to negotiate on other things such as cycle time or payment terms when facing a price increase.
Cut through the noise.
Salespeople will be the first to sound the alarm for customer loss if you raise prices. Ask them to produce evidence that this is the case. In some industries, you could test what the actual price elasticity may be. Paying commission on margin instead of revenue is one way to ensure your sales team is taking ownership of pricing.
Make price increases a habit.
This may be the time to ingrain annual price increases into your strategy and thinking. Creating a yearly process where you assess cost and customer performance is a good business practice. While vendors want to be viewed as fair, the reality is that some customers are more expensive to serve than others.
If customers are going to score vendors for performance, vendors could score customers on arbitrary returns, credits, and delays–if for nothing more than their consumption. Price riders are commonly included in contracts, assuming increases at regular intervals.
Vendors must be thoughtful about how they share bad news with clients, and the sensitivity of such conversations requires tact. While a letter may suffice in channels like a wholesaler or dealer network, in others a peer-to-peer communication (such as CEO to CEO) may be necessary. Customers will have respect for providers who reinforce their values, such as paying competitive talent wages.
Consider dynamic pricing.
Algorithms are driving real-time price increases in many sectors of our economy. Today, most hotel and airline pricing has shifted to real-time driven by machine learning—Uber and Lyft price based on the number of drivers, traffic conditions, and other variables. The nature of such “auctions” incentivizes buyers to act.
Think about timing.
If you take incremental price increases on a regular cadence, you will condition clients to expect it. It’s essential to provide adequate notice so clients can adjust their budgets and systems. It would be best to weigh customer success, and it would be harmful to pass on a price increase when satisfaction is low.
The key to price increases is to position them within a spirit of partnership. True partners will understand you have a business to run. Given the supply chain disruptions in the last year, they should be willing to have holistic conversations about delivering value and reducing cost.