Setting prices is a critical moment in any business. It’s an exciting time to gauge your product’s value, compare it to public perceptions, and bet on your future.
Unfortunately, you can’t keep the same prices forever. If you could, a bottle of Coca-Cola would still cost a nickel.
Raising your prices can increase cash flow, set customer expectations, and sustainably build your organization. With prices set correctly, you might feel like you’ve found the perfect balance in your business.
However, not all change is good. Raising prices can also cause some problems you should consider.
Concerns about pricing can come about in several ways:
Once you’ve decided to make your buyers fork out a little bit more, another problem appears. Raising prices could lead to a loss of your loyal customers. Is there a simple way to fix this?
Unfortunately not. Sales and marketing is not a game of logic. Your business is much more than a straightforward set of products and prices. Other considerations must come into play, including:
By considering these factors, you can better calculate the equilibrium of cost and price, supply and demand. Raising your rates can have positive effects on your business, but it can also cause some unexpected outcomes that could be hard to measure.
Try to think outside the box for any potential alternatives. Do you have any other options besides raising prices?
Within your balance sheet, you have several alternatives to alter the flow of money in and out of your organization.
Cutting costs. Limiting expenditure can happen in any number of ways. Have you looked at cheaper places to rent? Did you try renegotiating with your suppliers? Have you thought of dropping a few staff members? These are all relatively high expenses that have a significant effect on your budget.
To find other, minor fixes, speak to a financial or tax planner about lending or restructuring the business. If you need help with personal finances, try some FIRE tips or wallet hacks.
Reduce the impact of price rises. Highlight when you lower prices and hide when you raise them. If your prices are raised but remain lower than other businesses, publicize this fact. Otherwise, raise the prices slowly and in small increments so that people don’t notice a huge increase.
Increase your perceived value. Consumers might not mind that your prices are higher if they feel your product or service is better. Other ways to temporarily boost your value include offering free items, deals, or time-based discounts.
The aim of these strategies should not be to confuse consumers. Long-term, successful businesses present a simple value-to-cost equation.
However, after you’ve exhausted all other alternatives, it’s time to raise prices.
Consumers vote with their feet, as the saying goes. Changing your prices could have negative impacts you don’t see immediately. Some may spring up only in the weeks or months ahead.
By examining how other businesses have raised their prices, you can learn how to lead, manage, and recover from a price increase.
Netflix raised its price by $1-$2, bringing the average subscription cost to $8-$16. The hit to an individual’s pocketbook was low, less than a cup of coffee. With 58 million users in the United States, Netflix’s modest price adjustment made a big difference.
The move pleased investors and boosted the company’s stock, which raised much more capital than the price adjustment itself. Ultimately, this outcome improved Netflix’s short-term cash flow and signaled a longer-term focus on profitability.
Why did customers put up with the change? First, the price rise was small. Plus, Netflix continued to invest heavily in new content. In 2018 alone, it spent $8 billion in content. Netflix has rightly focused on providing more content to lift the company’s perceived value.
Whole Foods Market also raised its prices successfully. The Amazon-owned supermarket chain did an excellent job managing public perception.
First, the company attributed a rise in retail costs to rising costs in material, labor, and shipping. This explanation immediately shifted blame, protecting the brand.
The supermarket chain also chose an excellent time to increase prices: when contracts with suppliers were ending. Contract negotiation time is an excellent opportunity to renegotiate prices because the buyer has the power to leave the supplier.
Whole Foods has a reputation as being more expensive than other supermarkets. However, the company softened the blow through careful wording: “We remain committed to continuing to lower prices with Amazon as we deliver on our mission to make high-quality, natural and organic food more affordable and accessible.” Using the words “committed,” “continuing,” and “mission” reminds their ethically-minded customers of the supermarket’s brand value.
By taking a lesson from Netflix and Whole Foods Market, you can raise prices at your business while avoiding blame and highlighting your brand’s positive qualities.
“What is a cynic? A man who knows the price of everything and the value of nothing.” — Oscar Wilde.
Consumer perception of price is arguably more important than the price itself. It’s why economists measure metrics like consumer confidence and perceived inflation.
One study looked into a rumor that gas stations always raise prices on Fridays, and then drop them on Tuesdays. In fact, after measuring prices daily for four years, researchers found no discernible pattern to price hikes. Instead, drivers were more likely to notice higher prices on Fridays because that was when more people were driving.
If you’re attempting to increase your rates, what your customers think matters. Try the following tried-and-tested tips for managing customer perception:
A cardinal rule is to identify your customers: Are they bargain hunters? Are they able to absorb the hit? Use your intuition, market research, and customer feedback to evaluate how you should price your products.
A price is a signal to your customers, employees, suppliers, buyers, and you. If you send out the wrong signals, you might not like what comes back. Wrong prices can lead to lost profit, sluggish growth, and tight cash flow. Finding the right price can balance your books in the short term. It can also please customers and create stable long-term growth, which should be your ultimate goal.
As you’ve realized by now, raising prices is not a silver bullet. You need a strategy that navigates pricing problems and carefully manages customer perceptions.