Alan Flower is in a pickle, and he came to us for help on a recent podcast. Flower asks, “How can I increase prices and not lose customers?” Since I figure with rising supplier and material goods costs, not to mention energy costs increases, many of you are facing the same issue, I thought we could also discuss it here.
I’ve had many conversations with our clients and heard many TV interviews where people say we need to increase prices, but we can’t raise them that much because if we do, we’re going to lose customers. This pickle is a difficult one when we live in times of inflation. Sometimes you have to increase your prices to keep any margin at all. Your customers probably are facing similar decisions in their line of work, too.
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Now, a simple answer to this pickle is not to increase prices. Then, you keep all your customers and Bob’s your uncle. Better yet? You can decrease your prices. Then you really won’t lose any customers.
Both of those would work, at least at first. There is just that pesky business about rising costs to consider. Flower would have a thriving business with many customers when he went out of business.
So, since those suggestions are useless, we came up with a list of things Flower can do to prevent losing customers when he takes an essential price increase this year.
Let’s get into it, shall we?
Set Proper Expectations
Increasing prices by 20 percent without warning will negatively affect your business. However, communicating a price increase and the reason ahead of time softens the blow.
You must include the reason. Not everyone will understand why you are taking an increase without an explanation. Moreover, a fair warning of a price increase is not enough to set expectations, no matter how economically savvy your customers are. Have a reason and give it to help manage their emotional response to an increase.
Use a Story to Explain
People are storytellers and process information better when receiving it in a story form than when it isn’t. Explaining why the price increase is coming in a story, particularly when you are in a relationship business like many business-to-business relationships are, is essential.
For those of you that are thrown by the word story, we should clarify that your explanation shouldn’t start with the phrase “Once upon a time.” Instead, a story in this usage means explaining the facts behind the decision and how it came to this price increase at this time.
For example, energy costs in the UK are up 300 to 400 percent. So, if your business uses a lot of energy and it’s in the UK, it’s clear that the price will go up. Since most people in the UK are acutely aware of this increase, they will know how your story ends before you even get there.
Remember also that the more heads-up you give and the more communication, the better. Knowing before the increase is effective will help maintain that relationship.
Frame It to Optimize People’ Evaluation of the Price Increase
Everything we evaluate, including prices, is done by comparing them to something else. Therefore, if you can change what they compare you to, you can optimize their evaluation of the price increase.
For example, if you frame the price increase compared to your old price, you create an unfavorable comparison; it’s higher, and that’s that. However, bringing in higher-priced competitive offers, which are also likely increasing, might change how people view your increase.
Moreover, introducing other essential facts about price increases over time will help soften the blow. For instance, if you haven’t taken a price increase recently or have only increased prices by a small percentage over a long period, it might make it easier for customers to accept the present price increase. Or maybe the overall percentage increase for everyone else has been much higher than yours, so your lower percentage increase looks better in that context. Saying, “Prices across the board have increased 25 percent, but we only took a 20 percent increase,” sounds much nicer than, “we are taking a 20 percent increase.”
Test Your Price Increase Tolerance
You should test your price changes. Running a pilot in some locations or regions of the country can tell you a lot about how tolerant your customers will be of an increase. Also, testing in some areas will allow you to sample language used for storytelling or framing to see what performs best.
Be as Up Front as You Can
Transparency is an essential quality people look for in their brands. So, avoid doing anything construed as deceptive that could harm your customer relationship.
Shrinkflation is an example of a dubious practice that can backfire on you. Shrinkflation is reducing the product size rather than increasing the price. Organizations might reduce the ounces included or how much filler is used inside the box or bottle to disguise the shrinking down of the product.
Customers often don’t notice, and this strategy works for everyone. For example, if your cereal box now holds 15.2 ounces instead of 18, you might not notice. Or if the dome at the bottom of the peanut butter jar has a more aggressive arc than it used to, displacing more of the product to make room for it, you might not notice that either. (It’s still deceptive, but you got away with it, so who’s complaining?)
However, people tend to get mad if your product is different enough after shrinkage for people to notice. For example, Lorraine and I eat healthy, nut nutrition bars at night. Unfortunately, due to shrinkage, they are about half the size they used to be, which is annoying.
A few years ago, Toblerone, a candy company, increased the gaps between the triangles in its candy bars and people noticed. As a result, people went after them savagely on social media. It was not a good look for the candy bar or the company.
Add Value to Your Offer
Customers evaluate your offer not only by what it costs but also by what it provides them, or, in other words, the benefits it offers minus the cost. Therefore, if you have to increase your price, is there a way to simultaneously increase the value you provide?
Perhaps it’s an additional product or service you can include along with the price increase. Increasing the benefits will help people evaluate the increased price more positively than if the benefits stay the same.
In some cases, you might be able to bundle the service with another. Perhaps by putting the product with another, the price increase would be more attractive to people, particularly in a specific segment.
Consider what streaming services are doing now. For example, Disney will have a service at the same price but with ads, or people can upgrade to a premium service at a higher rate. This price increase represents adding value with the price increase in that for an additional $3 a month, you avoid watching ads. (However, since you used to pay $7.99 per month and didn’t have ads, it still is a $3 price increase.)
Implement it Incrementally.
Another option is to roll the price increase out slowly over time. Then, smaller increases can be more palatable for customers.
You could also calculate what happens if you delay the price increase. Six months’ delay might make a difference in how people view the price increase. So, if you can wait, why not wait? The caution is that you could make a short-term decision to have a price increase now that over the long term wasn’t necessary. So, can you roll it out slowly or hold it for a time?
Create Stickiness.
Speaking of long-term solutions, having a strategy that makes it difficult to change or creates a barrier to switching can help with a price increase.
For example, in 2018, Amazon raised the price of Prime to $119. Some people dropped it; they had reached the service’s price increase limit. However, most people stayed.
Last year, the price went up to $139, $20 more than it had been. Again, some people canceled, but most people stayed. Why? People stayed after the price increase because losing Prime meant more pain than the price increase caused.
For me, canceling Prime would be more than losing fast shipping—although that is a significant benefit. It would also mean not having access to Prime Video and Amazon music which I am accustomed to using now. Therefore, I would loathe giving it up over $20.
We’re living in tough times. No one wants to lose customers over it, but price increases are a necessity in many cases. Therefore, it is essential to manage this process as best you can. Start by talking to your customers about it and explaining what you’re doing and why. You won’t keep them all, but you will probably keep more than you would have by increasing without telling them, which is an excellent start.
Colin has conducted numerous educational workshops to inspire and motivate your team. He prides himself on making this fun, humorous, and practical. Speak to Colin and find out more. Click here!
