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...
The Business.com team recently published a guide to How to Set a Price for Your Service that can help answer your question.
I agree with others that if you have to raise prices on your existing customers, be honest with them as to why. For example, has the cost of materials increased and you don't want to compromise the quality of your product/service by using different materials? Share that fact with your customers. They will appreciate that you aren't jeopardizing the quality of your product/service to make more profit.
Also, make sure to research your competitor's pricing before setting a price and notifying existing customers. You can use competitor's prices as a benchmark to set your prices and avoid having to change your prices again if customers can find the same quality product/service at a lesser cost.
The guide above advises you to price higher than you think you should. What this means is don't' sell yourself short or be afraid to ask for what you deserve. 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?
Without reading some of the other comments, I think it is important that you realize that you don't set prices, the market does. You can pick a marketing strategy, do you offer more for more or less for less. Your pricing has to align with your strategy, if you are offering a better product or service than your competitors then you can absolutely raise the price. This is your value proposition. But if you are offering the same product or service then they can get anywhere else then raising your price will be devastating. The point I am trying to make is you don't raise your prices because of your cost structure, you set your price to the market and your value proposition.
Certainly offer the new pricing to the new customers.
If your packages are on a subscription (continuous revenue payment), then it's best to wait until your current customers have expired their current contract before changing any prices on them. If your subscription-based pricing doesn't have an "expiration date" - and you want to increase your current client's payment - best give them some type of a "grandfather-in period" (a period for them to get used to the idea of paying more). For instance - announce your new features and plans for increased pricing to your current clients (via personal phone call). Assure them that you value their business and as a token of their loyal business, you would like to extend their original price for another 6 months (or how ever long you wish). Then set a meeting at 5-6 months out to see how they want to proceed: a) continue at their original price with less features or b) be billed at the new price with all the features. If budget is a concern with your current clients, this allows your current clients to keep on their budget using your custom-package method.
You can also use this opportunity to ask them for referrals. If their friends also purchase your products by a time-limit, they can also get in on the original pricing (for a limited time). Promote the savings their friends will gain by joining/purchasing today.
I would also consider a larger compaign announcing your plan to raise your rates in order entice a few more people to sign up at the lower price. Implement an expiration-date strategy in the future, that makes people aware that the price will go back to the normal rate after XX date.
I have had this same issue due to rising costs of applications that we were using for our business. I simply let my existing clients know that due to rising costs on our end, we needed to raise prices. That being said, I would offer them something as a thank you such as an extra month or two or some other service. New clients of course would pay a higher price but you want to be sure your existing clients feel valued and appreciated. Most will understand that you need to cover your costs. I assume there was no agreement that locked in their price for a certain amount of time? Hope this helps.
Hi Jacob, that's an interesting question and one that entrepreneurs agonise over. The reality is entrepreneurs are too timid to put their hand out and ask to be paid a fair amount for their services. If your fees are too low you will go out of business. Similarly, if your fees are too high you also will go out of business. It therefore is a fine balance and you need to listen to the feedback from the market to determine the appropriate fee level. To achieve that feedback I have two suggestions for you to consider.
1. A good consulting friend of mine sets his fees based on the "Blink test". Put simply, if they blink when you state your fee you have set it at the correct level. If they don't blink you are giving your services away too cheaply.
2. I reset all client fees annually and when I raise the fees to the new level I expect to loose about 10% of my client base. If I loose less, my fees are too low. If I loose more, my fees are too high. Now in setting the new fee, I test the higher fee on clients I win throughout the year, between fee resets. If my fee is too high I my conversion rate drops. If my fee is too low I have a 100% conversion rate. While fees should not be an issue I look for an 80%-90% conversion rate.
In regards to charging differential fees. Yes, provided you offer different services.
This is a time where you need good number modeling skills to go along with sales skills. I agree with the comment where the new customers are a no-brainer. Run the numbers on existing customers. You can make some assumptions that with price increases you will have points where you lose customers but that doesn't mean pricing increases don't still make sense. You can re-package things and highlight what your customers say are high value items (with you prioritizing high value/low cost). Everyone who hears an honest, "we can't continue with our start up pricing because we won't be in business so we've got to increase X %). From there understand emotions, 3% - reasonable, 5% - explain, 10% - sweat it. You only have 2 variables, how much and how many and if your business depends on both you need strong strategy skills and good communication to build the former and grow the later.
Before you consider raising your prices, have you made every effort to streamline what you do? Is there a smarter more economical way to do what you are doing? And if you determine that you are as proficient in your operations as you can be, then turn to raising your prices to new customers first, then if there are any activities that you have added to your service since the original customers had come aboard, then properly address the additional activities as the reason for your increases, but space it out over time in % increases. Ex. If you have to raise each customer $2.00, announce a $1.00 increase immediately, two months a $.50 and in another two months $.50. Most customers have enough common sense to understand that increases incur, but I warn you, if you increase prices, raise it enough to cover your operations for at least one to two years. You do not want to come back short term looking for another increase!
An overall minor price increase that is announced with a brief but specific reason to your existing customers, and include a statement that affirms your appreciation for their loyalty, BEFORE you apply the change is best and helps retain them, as they see it as good faith. If you see opportunity to vary your pricing model and change previous packages or set collective rates, the timing would be best for one inclusive change. Maybe your best selling services adjust only slightly, other value-added services with less demand remain as is, this might actually help attract more use by it staying at the same present rate - market that.
Rosanna, sorry for the late response. It hard to be too specific without getting into details regarding the specific product, but I can give a bit more detail of what I am referring to. First thing is to do the market research, knowing your competitors, and be honest about where you stand relative to your competitors. does your competitor provide a more limited scope of services than you do? Do you have some endorsements from highly respected clients or industry associations that speak to the quality of work that you have done? Has your service stood the test of time - in other words, have you done work 10, 20 years ago where your recommendations have been proven right, and the customer has seen the on-going benefits? All of these things mean that over time, the customer will benefit by ensuring that their customers are more satisfied, or that their costs over time are lower. In my case, I have a few times managed to save my customers more money upfront through my recommendations and negotiations with their service providers than my services cost. I have provided services in these fields for decades and have a track record that I can point to and have a wider scope of expertise, this can help to ensure that things do not fall through the cracks as might happen if you need to engage a number of different consultants for different aspects of the project.
Why not be as clear in your communication with your customers as you have been when asking your questions here? "I am transparent with you, I need to cover my operating costs" and so on. If you raise your price in right proportion to your costs you will never lose a client... unless the price is THE factor of their choice. In some countries (i.e. France) you can't sell without doing benefits - it's illegal. This is one of the tip for the negotiations as well...