For billionaire investor Warren Buffett, the most important
thing he looks for in a business is pricing power.
“If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business,” he says. “And if you have to have a prayer session before raising the price by 10%, then you’ve got a terrible business.”
The good news is that, to a certain extent, pricing power can be acquired. There are strategies you can use to minimize the impact of price hikes on your customers, and ensure that they stay with you. So if you’re in the “prayer session” camp, don’t worry: we’ll look at some of those strategies in this tutorial.
Price hikes are never popular, of course, and there’s always a risk of losing some customers. But you don’t need to dread raising your prices. Here’s a guide to communicating price changes to your customers in a way that makes them easier to understand and accept.
1. Explain, But Don't Apologize
The most important thing is to be open about the price increase and to give customers a reason for it.
Since it’s “bad news”, you may be tempted not to mention it at all, and to hope people won’t notice. And indeed, for certain kinds of business, this may work. For a retail business like a coffee shop or clothing store, there’s no need to put up a sign saying your prices have gone up.
But for a business where you have a lot of regular, repeat customers, most of them will notice, sooner or later, and they’ll feel cheated when they find out.
So announce the increase, giving reasons that people can understand. However, don't apologize or blame outside circumstances. Instead, be positive and show the customer why the increase is fair and makes sense.
For example, perhaps your business is being forced into a price increase because the cost of your raw materials has gone up. It may feel natural to blame those higher costs as you communicate to your customers, but it’s not a good strategy, according to sales expert Grant Cardone.
“Don’t blame inflation,” he wrote in an Entrepreneur magazine article. “Instead, increase the value of your offer.”
We’ll cover the issue of communicating your value in the following steps, but the key point is not to apologize or play the blame game. You could mention the increase in costs, for example, but in a more positive way. Here’s an example of how that could look:
“Our costs have increased 20% over the past year, so we need to make some changes to our pricing structure. We want to keep offering you great value, though, so our new monthly subscription price now includes [name some extra offerings that will make it feel like a good deal].”
2. Talk About Your Value
While some customers are very price-sensitive, most people don’t buy only on price. Many will stay with you if they value your product or service enough. So take the opportunity to remind people what they're getting.
“Communicate the core value proposition of the product/solution in the announcement and make sure customers remember the unique elements of the solution vs. the competition,” writes Lisa Singer of SiriusDecisions. “For example, state some of the key benefits you’ve delivered through the years (be specific), and explain how the cost increase will support the company’s clear goal of solving even more customer problems in the years to come.”
Maybe add in a bonus service, or upgrade your product. It’s hard for people to swallow paying a higher amount for exactly the same thing, but if you can throw in some extra support or services, it’ll be easier to accept. Or with a product, you could add extra features, or offer a longer warranty or some other incentive that will make your customers feel that they’re getting more than they did before.
3. Play Fair With Loyal Customers
Price increases are particularly difficult when you're running a subscription model, and customers have put a lot of time into doing business with you, expecting the prices to remain the same. Offering to grandfather in existing customers can help immensely.
Back in 2010, online-billing startup Chargify moved abruptly from a freemium model to a subscription-only service, and hiked the price of its regular subscription at the same time.
The pushback from customers was huge: the company was deluged with angry emails, got complaints on Twitter and TechCrunch, and hit the front page of Hacker News.
Even if the price increase was justified, many customers felt cheated. One commenter wrote, "...we were suckered into thinking that the free startup account would be around until we outgrew it." Another said, “Today you've turned around and told all of us that we don't matter to you."
A key problem was the lack of a grandfather clause that kept pricing the same for existing customers. People had built their businesses around a pricing model that they thought would remain constant, and suddenly it was increasing substantially. Stung by the backlash, the company was forced to offer a new, lower-priced subscription for existing customers.
Chargify survived the bad press and has seen its business continue to grow since then, but if you want to avoid upsetting a lot of customers, it might be wise to offer a special deal to existing customers.
If you’ve made a big splash about offering your service for $9.99 a month, for example, but have decided you need to charge $19.99 instead, then let your current customers continue at the initial rate, and only apply the higher one to new customers. Or if you want to make everyone pay $19.99, then at least offer some kind of incentive or discount to loyal customers.
4. Communicate, Communicate, Communicate
Whether it's on social media, on website forums, or in store, things can get out of hand quite quickly if customers are unhappy.
So you’ll need a comprehensive communication plan to make sure you stay on top of things.
It starts with contacting key clients first, in advance of the main announcement. Try to do it in person if you can, so that it’s more personal and you can explain the changes and answer any questions they have.
Then, before you make the announcement, you’ll need to communicate the price hike internally, to make sure that everyone within your company understands the change and is prepared to talk about it. It’s particularly important for sales reps and other customer-facing staff to be on board—you might even want to give them some sample scripts to help them talk about the new price structure—but also make other staff aware of it. You never know who your customers will end up speaking to, and it’s important to be prepared.
Then you’ll need to make the general announcement, sending emails or letters to all your customers at once and perhaps posting on your blog if you have one.
Timing is also important here. Be sure to give people plenty of notice before the actual increase goes into effect. There are two reasons for this:
- It lets people plan for the change, and make alternative plans if they need to.
- People tend to get less upset about things that are happening far off in the future than they do about things happening right now.
When the communication has gone out, be prepared to answer a lot of questions, both by email/phone and on social media. Some of the comments on Twitter or elsewhere may not seem like the sort of thing you want to engage with, but if you just leave them out there unanswered, you’ll not only make that customer feel ignored, but also give other people encouragement to jump in and share their own grievances.
Communicating with people clearly and promptly may not succeed in making everyone accept the new prices, but it will at least make them feel as if they’ve been treated fairly.
5. Offer Choices
The best way to make a price increase go down well is to offer your customers options.
In the earlier example, where your regular offering went up in price from $9.99 to $19.99 a month, perhaps you could decide to offer a cheaper, slimmed-down version of your service for the existing $9.99 price. That way, people whose budgets are really tight can still continue to use your service in some way. You might even introduce a premium option as well, giving customers a whole bundle of extras.
Even if customers don't take these other options, it can help reframe the value of your main offer. As we saw in our recent tutorial on The Psychology of Pricing, reframing the value of an offering and using price anchoring can make prices much more attractive.
So rather than just doubling the price of your main offering and asking customers to accept it, try offering them a range of different options. That way it’s less of a straight comparison between your old price and your new one. People will be drawn to compare the new price with the other options available, and so will focus more on the value of each offer.
As you’ve seen in this tutorial, there are several ways to raise prices and minimize the impact on your customers. Clear communication is key, but it’s also important to offer people choices, to talk about the value you offer, and to be confident and matter-of-fact in your tone, rather than apologetic.
The next step is to go ahead and take action. Decide on what pricing is right for your business (refer to our earlier pricing tutorial if you need help with that), and then start drawing up a communication and implementation plan.
Nobody likes to talk about pricing, and it’s natural to be wary of telling your customers that prices are increasing. But it’s even worse to struggle along with prices that are too low. Doing that will either mean you have to cut corners on what you offer or perhaps even go out of business, neither of which are good for you or your customers.