How can companies increase prices without upsetting customers? I was pondering this question out of necessity recently because Time Warner Cable increased the price for my internet service. I was not pleased with this development but it provided an opportunity to consider why they had done this, and how they could have made it more palatable.
“Why” might a company take the risk of alienating their customers in the first place?
- To increase revenues – One of the simplest ways to increase revenues is to merely increase the amount you charge for a good or service. (We neglect the issue of demand elasticity altogether here, although the company should not.)
- To improve margins – Labor and material costs are higher now than 10 years ago. Since the company’s very cost structure is changing it may be forced to pass along pricing increases in order to survive.
- Because they can – Companies that enjoy a monopoly (and governments, for that matter) can increase prices anytime they want.
- To imply greater value – Lower prices imply lower value. By the same token, higher prices often imply higher quality/value as luxury automobile brands and designer clothing have determined to their advantage.
- To lose customers – This is a less obvious reason to increase prices and doesn’t sound very “customer-friendly.” However, because customers have different values to a business, the business can make a financial decision – they need not all be served in perpetuity. In scenarios where a customer is patently unprofitable it makes financial sense to deliberately drive customers away. One way to urge them to seek an alternative supplier is to raise prices so that they choose to leave.
After making the decision to increase prices, here are three (3) best practices companies can implement to minimize ill will with their customers.
- Add value – it is very difficult to justify price increases if you haven’t added to the product or service. Sometimes the value is tangible (e.g. a 100,000 mile warranty instead of a 30,000 mile warranty on an automobile) and sometimes the value is intangible, or emotional (e.g. luxury purchases where customers buy brands with higher perceived values). Either way, add something so that added price is accompanied by added value.
- Communicate early – whether you want the customer to stay or you view them as unprofitable, communicate the change early so that customers can make business decisions. It is not necessary to broadcast your rationale, but if questioned, transparency creates a level of trust – even if the message is unpopular. If your costs increased and you are passing them along, say so. If your analysis shows the customer is unprofitable, say so. Customers may not like the message but most will appreciate the honesty.
- Make price increases a rarity (not commonplace) – rising costs are a reasonable rationale for raising prices, but consider making this move infrequently. If you anticipate that costs are likely to continue to rise it may make sense to make a larger increase now and upset a customer once, rather than instituting a series of small increases which prolong customer angst.
Unfortunately, Time Warner followed item #2 only. They notified me of the change. When questioned, their rationale was “because we can.” Customers never welcome a price increase and my situation was no different.
The pivot point is that companies can keep the majority of their customers by linking a price increase to a value increase, communicating about the change early, and making such changes infrequently.
What other ways have you used to make price increases more acceptable to your customers?