It goes without saying that consumers don’t like price increases. But the reality for business owners is that costs go up, and growing your customer base isn’t always enough to preserve your profits. In that case, raising prices might be the only solution.
Today, many businesses are grappling with how to address rising inflation without alienating customers. Do you raise prices? If so, how do you do it? It’s a tricky balancing act, and a poorly executed price increase can be extremely costly. According to the Harvard Business Review, acquiring a new customer can cost up to 25 times as much as retaining a current one. Here, we have compiled a list of dos and don’ts when it comes to raising prices and getting customers to shell out more cash.
How to raise prices and keep your customers
Before you jack up prices, make sure you plan carefully. Best practices include gradually increasing prices while remaining transparent with customers. Think about timing and whether there are alternatives to a straight price increase (e.g., shrinking the package size). If you can, try to add additional value for customers when asking them to pay more for your goods or services.
1. Raise prices slowly.
In order to avoid the “sticker shock” that often turns off customers, it’s best to raise prices in stages. One 2010 experiment outlined in the Journal of Marketing found that raising prices gradually after a sale, rather than all at once, resulted in more sales overall. Immediately jacking up prices, however, resulted in a more negative perception and fewer sales.
By phasing in price increases gradually, you can set future expectations and allow customers to adjust accordingly.
2. Communicate with transparency.
Raising prices without warning can leave customers feeling ripped off, especially if they’ve done business with you for a long time. Although many businesses shy away from discussing costs for competitive reasons, there is evidence that it pays to be transparent.
A 2020 study in the journal Marketing Science discovered that cost transparency can increase customers’ purchase interest by over 20%. Clearly explaining to customers why you’re raising prices builds trust, and that trust leads to willingness to accept price increases.
FYI: Leading with transparency promotes loyalty; 94% of customers say they would remain loyal to a brand that offers complete transparency, according to research from Label Insight.
3. Be mindful of timing.
The question of when to institute a price increase depends on your industry. For example, in retail, people are willing to pay more during the holidays. However, many expect that going forward, shoppers will start searching for bargains as soon as early November.
Raising prices after a holiday isn’t a great idea, but if you raise them too soon, you risk losing out on sales. Consider adding emerging payment options such as “buy now, pay later” to capture a greater share of cash-strapped consumers during the holidays.
4. Take a surgical approach.
For some businesses, raising prices across board is akin to using a cleaver when a scalpel would be more appropriate. Consider offering volume discounts while raising prices on smaller purchases.
Online retailers can try dynamic pricing strategies, where prices are adjusted by algorithm in response to real-time demand. Another option is to employ what economists call “shrinkflation,” where sellers reduce the size or amount of a product while keeping its price constant.
5. Add additional value.
One easy way to turn off customers is to raise prices and reduce quality. It’s a well-known psychological fact that people are more sensitive to perceived losses. Consumers don’t want to feel like they’re getting less than they did before. When you raise prices, consider whether you can add value in some other way. Perhaps you can elevate expectations by increasing product quality. You could also take a dynamic approach by raising prices on some higher-end items, while keeping lower-priced options in place for budget-minded consumers.
What not to do when raising prices
If you want to know what can go wrong when you try to raise prices, just ask Netflix. In 2011, the company announced that it would separate its popular DVD rental unit from its new streaming service. At the time, customers were paying $10 a month for access to both options, but the move meant that they would now be required to pay $7.99 a month for each, or $15.98 total.
Netflix communicated the change poorly; at one point, CEO Reed Hastings boasted to Wall Street investors that the price increase would boost the company’s revenue. Instead, more than 800,000 subscribers canceled, and Netflix’s stock price collapsed. The company was forced to abandon its new pricing plan, and Hastings admitted that he “messed up.”
Although Netflix went on to major success, the episode contained a few critical errors to avoid:
- Jacking up prices too quickly: Netflix’s plan amounted to an effective 60% price increase for any customer who wanted both DVD rentals and streaming. The sticker shock likely turned off many longtime customers. Since then, Netflix has raised prices more gradually, often by $1 at a time.
- Reducing value: The proposed split of the DVD and streaming businesses meant that many customers would lose a cherished service. Netflix’s streaming service was new at the time, so customers felt that their value for the money would be reduced.
- Failing to communicate: Hastings correctly foresaw that internet streaming would overtake DVDs and open up many new possibilities for consumers. However, he failed to communicate that vision to his customers, who only saw that prices were going up. The company’s botched explanation of its price increase was later lampooned on Saturday Night Live.
Did you know? Netflix eventually did raise its prices, but only gradually and after adding much more content for its customers.
Think outside of the box
Before you commit to raising prices, think about if there is anything you can do on your end first. Inefficiencies tend to creep in during expansion, so maybe you can find ways to reduce operational costs at your business.
Your existing customer base is your greatest access, which means you can double down on upselling and cross-selling opportunities. Make sure you are doing everything you can to boost customer retention and reduce your business’s churn. But if there is no way to avoid a price increase, make sure you follow best practices. In the end, you might be surprised at how positively customers will react when you take a thoughtful approach.