How to increase prices and not lose your customers (at the same time)

Let’s face it: The cost of running a business is higher than ever. Everyone deals with supply chain issues, labor shortages and inflation. Companies now need to balance these increases to protect their margins and to decide whether to pass these higher costs on to customers.

Communicating proactively, framing an increase in context of the value proposition and using data-based approaches are all key to raising prices without alienating customers. While those issues are largely pandemic-induced and transitory, many economists fear that inflation will be more persistent than originally anticipated. The general consensus is that while the prices of energy, transportation and logistics will likely go down, other costs, like wages and some commodities, probably will not.

 

An increase in cost of goods sold (COGS) is historically a common and widely accepted rationale for price increases. Still, be mindful of your customer base and market. Pricing builds or destroys value faster than almost any other business action. Price and profit studies in multiple markets have documented how a 1% boost in price realization typically means a gain of 8-12% in operating profits. (The exceptions are in markets and companies where scale economies, capacity utilization and first-mover advantages make market share and volume a potential source of advantage.)

 

Should I tell my customers about a price increase?

 

Be proactive. In today’s information-rich markets, comparative pricing is more visible to prospects and customers, and in B2B markets, there are buyer forums where people share information about product and pricing.

 

Should I raise prices on all products or just some?

 

One of the things I think the current situation is motivating companies to do is to take a good look at the data they use to make these decisions. Does your firm have the relevant data to make that decision?

They rely primarily on two sorts of data. One is accounting data, which in many companies obscures the economics of individual products. That's the way many companies, especially manufacturing companies with multiple products, allocate their overhead. They simply smooth it across the product line. And then, over time, it obscures the real margins and the real economic value or loss of individual products.

The other set of data that they often rely on, especially in B2B businesses, is from CRM, but that data is infamously noisy because of the human component. One rep considers a lead this, and another rep considers it that. One of them says A) is the most popular product, and the other one says, B) is the most popular product - based on a specific territory or account characteristics.

To sum it up: the question of raising prices on all products or the most popular, you need to lean on accurate data. However, the pandemic, the supply chain shocks during the recovery and changes in buying behavior are pushing companies to clean up the data they use as inputs for pricing decisions.

 

Once you have decided which products or services for which to raise prices, is it better to do so incrementally or all at once? 

 

There are a number of businesses (for example B2B supply contracts) in which you sign an annual, 2 or 3 year contract, therefore you can only raise your price at the end of the contract, and you do it all at once. 

On the other hand, there are lots of other businesses that use subscription-based pricing models — at which you can make a series of relatively small, incremental price increases over the course of the contract that really add up over the course of the subscription in terms of annual recurring revenue.

 

How can you best present price increases to your customers?

 

In messaging, the key issue is framing, and often re-framing your value proposition in the context of the price increase. In many markets, if you do not reframe, either the sale will fail or the increased price will not seem reasonable.

For some businesses, this means simply reminding customers about the value. For others, it may mean doing something else with your product or service, like adding a feature.

To do that, first make sure you understand usage and the relevant unit of value from the customer’s perspective - this will vary over time as a market develops.

 

How can companies know whether new prices are both optimized for the market and sustainable?

 

The key is price testing, because price is such a potent weapon of value creation or destruction, price testing should be an ongoing practice at firms, but it’s not. There is surprising inertia at companies when it comes to price testing and an over-reliance on surveys.

There are a couple of problems with surveys when it comes to making pricing decisions. One thing we know for certain from market research is that there is very often a difference between what people say in surveys and their actual marketplace behavior. 

Online technologies have made it increasingly viable for companies in most industries to do A/B testing and other tests in which you have the same product at two different prices in different distribution channels or different online media. And there, you're testing not what people say in a survey but their actual behavior. 

 

How can companies make sure any needed price increase goes smoothly?

 

Make sure that the people who actually communicate with customers know what they're doing and how to frame the value proposition, or reframe it if necessary, in the context of the price increase. In the vast majority of companies, including small to midsize companies, that is the job of the sales force.

The most important data is what target customers value about a product or service. And, in many B2B businesses, that's not only a segment-specific bit of data, but very account-specific. As a result, the really important information about [buying behaviors and value] is locked in the head of the individual salesperson or account manager. It becomes visible only when you do a good performance review.

Make sure your sales managers take reviews seriously and that information is flowing. Because when sales managers do sloppy reviews, they're not only perpetuating a culture of underperformance in sales, they're inhibiting the flow of vital information for pricing in the organization. 

A very common phenomenon is the 80/20 rule in the customer base: 20% of the customers account for 80% of the sales. You can't lose a lot of money on small accounts. You ultimately test pricing and your value proposition with those big customers.

 

Source: Netsuite

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