Raising prices is an inevitable part of doing business in a world where the value of money is constantly changing.
The details of inflation may be a bit fuzzy to most of us, but most of us are still aware it exists. I remember the first time I noticed rising prices. The smoothie I used to buy on a weekly basis was $5.62. One day, with exact change in hand, I saw the register display the increased price at $5.95. Now nearly 10 years later, I pay $7.25 for that same smoothie.
As I’ve learned how the world works and understand that supply and labor costs increase, it makes sense that selling prices would have to increase as well. Yet, as a customer, whenever I notice an increase in a regular purchase, I’m not pleased. Why do I have to spend more of my hard earned cash on the same product?!?
Raising prices is a scary concept for most companies. The company knows that if a customer notices the price increase, they may lose them. Those same companies also know that to turn a profit and keep their business running, they have to raise the prices. Seems like a losing battle!
How do companies raise prices without losing customers?
What is the perfect margin to make sure to keep?
How do you inform customers of a price increase? Or do you?
How often is too often to raise prices?
So many questions.
That’s why we’re here. We want to help you pave the way to develop a strategy for raising prices that you can execute confidently and professionally. These questions and more will be answered with our Top Tactics for Raising Prices.
When raising your prices, there are a few things you’re going to need to know before you take action.
Some of the most significant information is going to revolve around both your fixed and variable costs.
Your fixed costs are what you will pay regardless of how many items you sell or how many jobs you do. These are things like your rent and your payroll. Variable costs will depend on how many pieces you sell or the jobs you do.
Knowing your costs is vital to determine what your profit margins are. By having this information easily accessible, you are able to understand exactly where you are spending your money and why an increase in prices may be necessary.
Did one of your suppliers increase their costs? Did your rent go up?
An increase in costs (cost-push inflation) is one of the most common reasons your company will need to increase your prices.
Knowing what your costs are will also help you make a decision about when it may be time to make some changes. Maybe it’s time to move buildings or change the software you’ve been using.
Knowing your competition is key to being able to compete in your market. It helps your company understand where it is positioned in the eyes of consumers. Is your company the low-cost provider? The luxury provider? The innovative provider? Where do you stand?
A good way to figure this out is to use a positioning map. Check out this example -->
Aside from knowing your competitors' prices to help figure out what a reasonable price for your offering will be, it will also help to identify your closest competitors. Who else has a luxury price and is striving to be innovative?
Competitors prices are another important indicator of what margins you should be aiming for. They don’t have to be exactly the same as your direct competitor, however, they can be a useful tool.
You may be wondering how your positioning in the market is relevant to raising prices. If you make changes to your prices, you may change your company’s position in the market and consequently, move into different direct competition.
When you’re raising prices, another good idea is to check out how your competitors have done it. How much did they raise prices by? What time of year did they raise them? Why did they raise them? This intel can help your company get to know how customers reacted and take proactive steps to avoid a negative backlash. This can also be a price increase justification. They did it, so we should too!
Using the Top Tactics for Raising Prices
Once you’ve done your research and painted a clear picture of what’s going on inside your company, what your competitors are doing, where you plan to be positioned in the market, and understanding customers it’s time to choose a plan of action.
The following tactics can be combined or used on their own. Basically, this list is intended to give you ideas on how you might start raising prices that will best suit your company.
Develop a Messaging Strategy
We all know the power of words. The right words brand personality and create demand for your company’s offering. They can connect you to your audience and build trust and loyalty.
When raising prices, your messaging is key when developing a strategy. Even if your strategy is to silently raise prices. Silence is a message too… we’ll get there.
This strategy is all about making your product or service more desirable. What can you highlight to make it special?
A great way to increase the perceived value is to add an incentive to the offering. For example, if you are offering website services, your messaging could include unlimited revisions of the website. Even if you already offer this option, consumers will look at this as a benefit they may not get elsewhere.
A small change to an offering is another way to increase the perceived value, and in turn, provide price increase justification. Special editions or new and innovative technologies or processes are really exciting for people especially if they are already loyal to your brand. Even if they are not your brand loyalists, special edition and new can be pretty exciting for people - and will often encourage them to pay wayyy more.
An opportunistic time to increase the perceived value of an offering is if your company has recently been recognized with an award. Award-winning products are trusted. Basically, the comparison with other options they may have already been weighing has already been done. Consumers see award winners at the top of the competition. If you’re looking for more price increase justification, awards and recognitions are it!
The important piece to remember when using perceived value to increase prices is to maintain honesty. Do not use ‘New and Improved’ if nothing was changed and avoid making the customer feel as if they are being ‘ripped off’. Believe me, it’ll help you in the long run.
Tell ‘Em How It Is
This is often the most avoided option. It's a tough conversation and the reaction isn't always what you want.
Most of the time, companies will try to swiftly raise prices and hope consumers do not notice. That can work, however, especially in a business where a relationship is being built, taking control of the price narrative can be the best way to go.
Put yourself in the customer's shoes. They have been relying on your company to provide SEO services for months. They think your company is fantastic and they trust you to provide best in class service to increase their organic traffic. All of a sudden they get the bill and notice it is $200 higher than every month prior. This wasn’t in their budget and as a small business, this difference is extremely noticeable. Now they are ticked off and feel blind sighted.
This issue could have been avoided with a conversation about a price increase. This conversation can be in the form of a price increase letter, a phone call, or an email. Remember they trust you and respect your honesty. Talk about all the benefits you offer and discuss how the price increase will help your company to continue to provide the best in class service they already trust. You should be giving them a price increase justification.
Keep it positive and avoid apologizing. Be concise, to the point, and polite. Stay in charge of the conversation while listening to the concerns of your customer.
Go for a Silent Strategy
Sometimes you’re going to want to raise the prices of your products without making a fuss. This is especially valuable when there is limited communication with the customer or the price increase is minimal.
When raising prices silently, try a change the customer may not notice. Finding the absolute threshold (where your customers will start to notice the raise in price) is best practice.
With an increase at that level, if the customer does happen to notice they will often shake it off and minimize the increase. 'What’s an extra $5?'.
Another thing - if the customer does happen to notice and doesn’t shake off the increase, you may have started a customer retention issue. One suggestion is to plan a message just in case.
Many customers are looking for price increase justification. Why did the prices go up?
If there are unhappy customers, a pre-planned reaction can defuse the situation before you lose the customer.
Do what is right for your company, but keep in mind it is not recommended to make significant increases on regularly purchased products and services without planned communication.
Step by Step: Raising Prices Gradually
Avoid the shock. People adapt to change in small doses far better than all in one go. If someone moves an inch closer to you every two minutes until they are standing right beside you, you may not notice until they are at your side. If they take three lunging steps, you may feel as if they are jumping into your personal space.
The same concept applies to raising prices. This tactic takes time and requires more frequent increases to get to the intended price point.
Be aware that though these changes are small and gradual, if customers notice and are upset, you may have a hard time explaining multiple price increases over one. Remember, customers don’t like to feel as if companies are playing tricks on them.
If raising prices gradually is the best option, it is key to have a timeline for when the changes in price will occur.
When building out your timeline, you’ll want to have as many details figured out as you can. You should plan on how much each increase will be and the time between increases. You should have communication tips for the company to use should there be backlash from the gradual increases.
Add Value for Price Increase Justification
This tactic is different from the concept of perceived value talked about earlier. By adding value, you are actually making a change to the offering making it more valuable for the customer.
Many companies do this with products on an annual basis. One example is Apple’s fall iPhone releases. Every year, a new iPhone model is put out with changes to appearance, software, or capabilities. With it comes a price increase.
People are intrigued by change and very interested in having the newest and greatest thing. This is especially relevant for companies in the digital space. New automation and technology is impressive to customers. It is a great way to get those prices up!
For companies whose offerings are not easy to make improvements to, consider providing add-ons for a cost. Say your customers are paying for two social media posts a week. Offer one additional social post a week for a small cost to maintain customer engagement and interest!
With this option, your clients who cannot afford an increase in pricing will not suffer and you can start to earn more from your larger clients and increase customer lifetime value.
Premium options can be a difference in appearance or a different process for example. Similar to add-ons, premium options give your company the opportunity to raise prices on variations of the original offering maintaining accessibility to existing customers.
By having the original priced lower than the variations, you set an anchoring price. A slight increase in price for a premium option does not seem as ridiculous when you’ve seen the price of the original.
Pro tip if you decide to go with this strategy: don’t set the price of the basic option too high! An anchoring price will not have a positive effect on the perception of the price of the premium option if it is too high.
Benefits of Raising Prices
There are many reasons you might raise prices. It may be due to an increase in your costs, or it may be part of your long-term strategy. No matter the reason, there are some great benefits to raising prices.
Higher prices often increase the perception of quality of your offerings. It makes sense, if you’re charging more, you’ll have more resources to invest in your company and your work.
Another benefit to charging more is you’ll attract customers and clients who have more resources to invest in your offering. They will often time be more serious customers.
When you’ve raised prices, you can afford to attract customers and keep clients by offering discounts. If you have increased your prices by 10% and an existing client is upset about it, you can easily give them that 10% discount and show that you value them as a client. In addition to feeling like they got a deal, their loyalty to your company will increase.
Regardless of the industry, your company is likely going to be setting prices and regularly changing them. Most of those changes will be increasing prices. Because people are not fond of paying more, you’ll have to be sure you have a plan.
After learning as much as you can about your costs, your competitors, your position within the market, and your customers, you’ll be able to start developing a strategy for raising prices.
Once you know what environment you’re working in, it’s time plan. Your strategy can be built around one or many tactics so long as they are working together to form a cohesive plan.
Raising prices is an inevitable part of doing business. The great thing is, you don’t have to be scared of it anymore.