It’s almost the end of the year, which means many companies are putting the final touches on their 2008 price lists, and a lot of people are getting ready to have uncomfortable conversations with customers about why their prices are increasing.
Here are 7 tips for raising prices. As you consider them, think not only about how you should relate price increases to your customers, but how you would like your suppliers to inform you.
1. Prepare your customers in advance. Yes, this takes planning, and it isn’t always possible, but for annual price increases, you can start communicating well ahead of time. Some people aren’t in a position to do this, because they haven’t thought about their pricing yet. Others don’t want to encourage customers to order large quantities at lower prices and time-shift demand (while some companies are hoping they can stuff the channel). Here’s a great example from Freebirds, a quirky chain of burrito shops in Texas, which illustrates points 1 & 2:
2. Provide a reason that the customer can understand. In many industries, the surging price of fuel (and/or the related increase in the price of corn, transportation, heating, and anything (“everything”) related to the price of oil) drives surcharges or simply price increases. In other cases, it’s the price of cheese. (This is probably also driven by the price of oil, which has driven demand, either market-based or legislative, for ethanol, which has caused the price of corn to sky-rocket, which means it’s much more expensive to feed cows. Not that cows are actually supposed to eat corn, but that’s another story.)
3. Increase the price, but reduce the cost. This sounds counterintuitive, but in some cases improvements in your product (or service) may allow the customer to derive the same or better value with less of your product. Compact florescent bulbs, which cost several times as much as conventional filament bulbs are a good example. The unit cost is greater, but the total cost of ownership is lower, because they consume less electricity and require less frequent replacement. Service automation can also deliver improved value for less money, even at a higher dollar-per-hour rate.
4. Reduce the price with a new offering. This post is about price increases, right? So why are we talking about reducing the price? In some cases, you may find it advantageous to split an offering into 2 or more offerings, one of which has “premium” characteristics that command a higher price point, and one of which strips out some value but also significant cost drivers, allowing you to improve profits even at a lower price. Customers can then self-select the premium or value offering, depending on their needs. For example, a small printer included “free” rush service as a competitive advantage against bigger firms. So everyone ordered rush delivery, regardless of when they needed their print jobs. Without a price increase per se, the printer offered a discount for longer lead times, saving the firm and its customers money.
5. Be up front about it. A lot of people find this conversation uncomfortable. We risk alienating a customer, which can be an emotional and financial stumbling block. If we don’t actually believe in our value proposition, we often signal to the customer that there is some wiggle room. Instead of saying “the price is going from $2,000 to $2,200”, we say things like “we’re planning a 10% list price increase, and we can discuss how that will affect you.”
6. If you’re in a business where the sales reps negotiate with your customers on price, create a SPIF for reps who achieve the full price increase. Then your reps will be coming to you demanding appropriate training on the rationale and justification for the price increase. Note that you’ll get better results if you involve the sales force first, instead of pushing a price increase from “on high.” Most companies that do broad price increases in a heavy-handed manner end up with very mixed results.
7. Increase the perception value. At the end of the day, price is determined by value, so making sure your customers understand the value you provide is essential. Even if your offering hasn’t changed, your ability to find the right audience and give them the right message can improve.
Hopefully you have already set your pricing for 2008, and will file this away for 2009.