How can I raise prices on my existing customers without losing them?
We launched our startup initially with all inclusive one-price packages for our services. As we grow, our operating costs can no longer be covered with the current prices we have set. I want to make our packages more expensive, and then offer custom pricing for customers that might not need everything we offer in our packages. Should I only raise prices to new customers, or can I raise them on my existing customers?
It depends - your existing customers? Is there a big price difference between what they purchased and what you want to raise things to? If so, I would do a special price for your existing - raise it but not all the way - in another words - let them know what is happening and why -
Then I would make them feel special - because you are our long standing clients, because you believed in us when we started our business, (however you want to word it) you can explain that they will have a slight increase - make them feel that they are still getting a good deal - then explain that as of a certain date the new package pricing and custom pricing costs will take effect. (but it won't include them as they are your long standing customers)
I am just shooting from the hip here - but I think you get the picture - if you have a significant price increase and you increase your long standing clients to the new price range - you will loose some - but if the increase is half of what you are charging others - they will feel that they are still getting a deal and stay with you.
It is about loyalty - when I raised my rates by $5 an hour - I didn't loose anyone - I gave them two months notice and explained why - and this was the first raise that I had done - it worked fine - but I do know if I would have raised my rates more - I would have lost them - but for the new clients coming on board - they had the rate of $15 per hour higher then what I was charging - the new ones didn't know the difference -
Dealing with pricing as a startup is always challenging and one of the most important activities.
Here are some tips I've learned over the years:
1) You actually want to raise your prices enough so that you are losing some customers. If you raise your price and keep all of your customers you are still too low. In fact, I remember with one business we did some analysis and found that with one inexpensive package we were loosing a lot of money so we raised the price by 400% and expected that we were going to lose 90% of those customers... which was actually great because we were losing money on all those customers.
2) Keep your pricing simple. If you start putting a lot of different packages together it quickly becomes a) unmanageable on your part and b) hard to understand from your customers point of view.
3) Sometimes business focus too much on lost customers and ignore their existing and most profitable customers are. Identify who your most profitable customers and model your pricing after them.
4) Conversely, and an extension of point one, find your unprofitable customers and fire them. This last point is very hard for entrepreneurs as you want to make all your customers happy, however, once you start the habit of clearing out the dead weight it will enable you to focus more on profitable customers.
Pricing is one of those issues that will never go away but is also critical as it can make or break a business.
For new clients you have nothing to explain. You quote your prices and they are on your new rates to start with.
With your existing clients, I would firstly be honest and open with them. Hopefully you have built enough relationship with them that you can have an open discussion.
Secondly, be prepared to work a transition pricing. Remember every business works on a budget, and if people have based their annual budget, or existing bids (if you are sub-contracting), then you need to come to some kind of agreement. This allows your customers not to get burned and feel you had them over a barrel. Any feeling of resentment or impression that they were caught between a rock and a hard place, may encourage them to look elsewhere. Some you may be happy to lose but most customers you would want to keep.
Remember not all business decisions are rational. As much as business people like to think, most decisions are truly irrational and wholly emotional, which you do not want to bet at the receiving end of! Best deals are when both parties win, so you should always go for Win-Win. If you go for Win-Lose, whoever ends up on the "Lose" side will feel resentful and will get even as soon as an opportunity presents itself.
So work with them and show them you understand their issues and this should enable them to give you a fair hearing.
Jacob, Price increases are a fact of life. Like taxes, they always go up.
Some companies have a pricing policy from which they will automaticly send out notices every 6 mths with small % increase. Others do it once a year, but it has a bigger impact.
DO NOT Shy away from price increases. You have already outlined the reason for the increase. Power, rent, transport costs, materials and wages all go up.
You can apologize for the inconvenience, but not the fact that you have to ask for more.
Work out your strategy, Provide for at least 1 months notice, state that it relates only to new orders, that way your customers are not having to go down the chain asking for more.
Identify your customers who are not using the full package, contact them with a more tailored made package.
Do not custom each client, but have a standard reduced package.
If from your client history you can see that maybe you can provide 2 -3 levels then develop that.
1) Basic introduction package.
2) Standard Package
3) Professional Package - What you are currently doing.
Make sure you cost each one and that with each level you include something that will really provide value added product and pricing.
Do the same for each package. This way the client can see the value of the upgrade to your highest package which is what you are currently doing.
This way if they want to move along your scale, they are still deciding on your product / service.
I hope this is helpful to you.
Great question, Jacob for you and others. So many concepts and strategies. Pricing is just one of the variables in the nine P's of marketing. People or as you explain your "existing" customers is another.
Pricing is tricky. Both in the short-term and in the long-term. Add that you're a start-up and it becomes trickier. Actually your customers and the marketplace will set prices.
In my MBA classes if we boil down everything into two major points: you need to increase revenue and control costs.
Your product, product improvements, sales force and employees play huge parts in any price increase. As Management guru Peter F. Drucker once said: “The aim of Marketing is to know and understand the customer so well that the product or service fits him (her/it) and sells itself. Price is important in this equation. And this is one of the reasons I created the Nine (9) P's of marketing. “People” or Targeting was slightly forgotten in the Marketing Mix, and is a major, significant part of the Nine P’s of Marketing.
Companies do not get potential users or customers to try a product by convincing them to love their brand. You get them to love a brand by convincing them to try and use (continue to use/repeat sales) the product or service.
Developing a strong brand is a byproduct. It comes by executing and doing the elements/parts/things/variables/ingredients/components in the Nine P’s of Marketing... right. Make sure the Product or Service is excellent. Research and Planning excellent.
Be sure your company is taking good care of your customers (People), and having the right Planning and targeting (People), the right Product or Service, right Place or distribution, right Price (here it is again), right Promotion, right Partners, and the right Presentation, with the right amount of Passion in the 9P’s of Marketing. Here to help. All the best.
From my point of view, your current customers are your guarantee for the future. I would not raise prices for them, you should even work on the customer loyalty.
1. For new clients I would indeed increase the average price of the package, by rising the price of each single service/good, on which I would apply a discount by unit, the more the customer buys.
Today : 100 for a package (5 units of service, 20 for 1 unit)
Tomorrow : 30 for 1 unit, 26 for the second, 23 for the third, 20 for the fourfth, 18 for the fifth, if of course the previous one is bought. Total is 117. This allows you to raise your margin by unit sold.
2. Try to sell new services/products to your existing customers, you don't have to produce/design it yourself, you can make a partnership with another company and get a commission
3. Sell/package/market ! Find simple, transparent, powerful arguments why you products are the best and diserve their price. No need to invest a lot of money though
You know your business. If your product and service is high, then there should be no issues for necessary or reasonable increases.
Good communication with current clients is essential. Surprises sometimes arent favorable when raising prices.
Whoever said "Profit is bad", they are crazy, who ever said "Build a business's volume with lower pricing and the profit will come" is crazy also. I know some companies that were afraid to increase their pricing because of loyalty and the fear of losing the customer. One in particular had so many customers that he lost money servicing because he didn't want to loss the sales volume he built. Sales volume without profit to keep loyal customers is an easy death which happened to his company.
The bottom line is you need to do what you have to. Provided you are efficient in your operating of a business.
I wish yo the best of success, Gil
This is a common scenario Jacob, one that when well-handled can be a great boost to your business. So start by looking at this question from a more constructive point of view.
How can I attract additional clients and increase my existing customer’s loyalty by raising prices?
Work through this concept methodically and develop a plan that is easy to introduce as an additional benefit to the clients that originally proved invaluable to your start up.
1- Look into your client’s alternatives; what are their options if they were to leave you? Which of your competitors would be in the best position to shanghai your customers with a better offer?
2- Are there any clients (there usually are one or two) that you would like to see the back of? A price hike can be effective a means of culling high maintenance (non- profitable) customers that will only ever be a drain on your finite resources.
3- Review your financial projections and pricing to determine the lowest possible price structure that will cover you current and projected operating costs. Then add a workable margin to support ongoing expansion, this will be you base price not your published “list” price.
4- Compare this new base pricing model with your competitors best pricing. If you don’t know exactly what they are do some overdue comparative research and find out before you announce anything. Your new base pricing must not make the alternatives more attractive than staying with you.
5- Now inflate and set a retail/list price that will allow you to offer a significant and attractive discount (should be at least 25%, up to 50% at best), that reduces it to the original introductory price offered when you started the business (the low rate your existing customers are on).
6- Now you will have establishes a competitive “list” price and a discount structure that permits your current (foundation) clients to be offered exactly what they are accustomed to paying.
7- Let your current valued clients know that their patronage during your establishment phase is both recognised and appreciated. Now as your growing enterprise prepares to offer them even better and/or enhanced services they will be rewarded for their ongoing loyalty. They qualify for an exclusive “Foundation Client Discount” (as in 5 above), for renewing their contract for a further 6 or 12 months. This permits you to raise your pricing, and not actually make them pay any extra for an initial period. Good news, some special treatment and no reason to shop around!
8- Link this “Foundation Client” advantage to a loyalty referral program that will allow them to maintain their adventitious Foundation Client rates providing they refer two or more new customers during each contract period. New clients referred by a Foundation Client also receive something equivalent to about half the Foundation client’s discount rate, a price that is at least equal to your new base price.
9- Now you can gradually increase your list price over time (annually, quarterly or at contract renewal), whilst maintaining discount percentages (not net prices).
The problem with raising prices is that most don't raise the "perceived value" with their customers. They think you are trying to just make more money with existing value. So the simple message is...create more value and you can raise prices. Easier said than done in most cases.
Here's another alternative to consider...and it works famously in today's market. Find new ways to save them TIME. Time is the most valuable asset people have today...we feel we have less of it and are bombarded by tons of noise to take it away from us. Give it back to your audience. How? That's where you come in with added value.
Offer them better information, more content to help them do their job better, improve their life, and a host of other ideas that will eventually save them TIME. Do this and they will be happy to pay you more...in fact most will think you are undercharging and be more than willing to pay more for your services.
Hope this helps...
Hi Jacob I think Ben has made some great points. An additional thought: it appears you do recurring work with your clients so that at some future point you could declare there will be a price increase. Essentially you are introducing the idea with time to spare. More importantly (and again to Ben's point) do you need to increase the price of current customers or is the flow of new customers adequate to offset?