A couple of clients from different industries asked me to comment about their intended price increase, so I wrote about the “7 Options to Increase Profit Without Increasing Price“. This is a follow up article to those without any other recourse but to increase price. In other words, this is to prepare for a Plan B scenario if any of the 7 options previously cited cannot be done for whatever reason.
A simple formula to remember is that sales revenues is a combination of two important variables, namely, selling price and sales volume. The intent to increase price must come with intent to maintain sales volume from current customers, as well as to delay any potential shift to your market substitutes. Otherwise, it is just a waste of effort if a firm miscalculates and ends up losing customers more than the gain in price increase, especially if customers feel timing of the price increase is off or exploitative.
Some price increases are fair and tolerable, even in the context of tough economic times. Some justifications are given below:
- Customers know that industry’s costs have gone up. In other words, customers are not just being milked.
- The margins maintained by the industry as well as specific firms are not excessive and unconscionable.
- Price increase is done for products and services that are still in high demand and not yet on a declining trend.
- Firms enjoy goodwill and trust reputation without prior record of profiteering.
- Firms in the same industry have announced similar level of price increases without collusion.
- The increase in price is still within or smaller than the ratio as the increase in costs.
- The increase in price is still within a level affordable by the target consumers who are willing to pay the new price.
- Firms have considered other options to mitigate or minimize a price increase.
- Despite a price increase, the firm is still one of the lowest price players in the industry because they started by offering not their regular prices but their introductory or promotional prices.
Do know a slight increase in price can have a big impact on profit so while firms may need to increase their price, they want to do this with the least harm as possible. In my three decades of helping business clients, I have witnessed many who did not do it right, and made too many assumptions in deciding and implementing price increases. There was a company which experienced an 80% drop in the number of customers within six months for increasing price by a small P5 a month (figures changed for the purpose of illustration). Instead of adding the predicted P6 million a year in profit for that Php5 increase, the product was phased out earlier than expected. Even a price rollback and additional concessions made to customers were not able to solve the damage caused by the prior price increase announcement. In this case, the consumers just decided to stop using the service (or product) altogether as there were additional options with better value out in the market.
Below are some suggestions how firms can increase price without losing customers:
- Communicate by reminding the value you offer is still better than the new price you will be charging, or better than available substitutes. This entails an understanding of surplus pricing, and strategic partnering instead of merely being transactional without value adding activities that benefit customers.
- Reduce perceived cost of the customers. Longer lasting, cost savings in the long run are some of the examples.
- Give options to customers how they want to cope with their cost increases. For instance, offer volume, cash or prepayment discounts. Also offer smaller packs at same prices if appropriate.
- Lessen the pain of a price increase. For example, allow loyal BTB customers to order one last time at old prices if you still have old inventories. For beverages, surprise customers with upgraded size temporarily after a price increase. For services, give something as consolation (like a free 10-minute head massage for a 1-hour massage).
- Learn from Salami slices. Instead of doing one big increase, spread it out into multiple smaller price increases to help customers cope. This also tests the acceptability of your new price.
- Do strategic alliance with selected key volume customers by offering a transparent cost-plus formula that automatically adjusts price upward or downward when cost goes up or down respectively.
- Have a servitization model. Charge only when products are used instead of selling products themselves.
- Innovate your revenue model. For retailers who rent out their products, instead of increasing prices, offer to sell to retailers at cost, and in exchange, be part of an equitable revenue share for each revenue they collect from their customers.
- Redefine affordability. Allow longer terms on installment payment to reduce the impact of the price increase.
- Tap new customers in case some of your old customers will not reorder as a cushion.
The greatest enemy of a price increase is overconfidence, i.e., not exercising due diligence, not utilizing the correct process and not plotting options in making an important price decision. A stroke of luck may save a company, otherwise, a “purification” process to temper pride, arrogance, or inexperience may be the consequence, if time and cost consuming fire fighting will not work.
Josiah Go is chair and chief innovation strategist of Mansmith and Fielders, Inc. The 13th Mansmith Market Masters Conference is accepting registration through www.marketmastersconference.com