The price you charge, more than any other business variable, has the greatest impact on the profit you earn. Unfortunately, most business owners are reluctant to increase prices for fear of losing customers or revenue.
The risk is much lower than you think. For example, if your current Gross Profit Margin is 40% and you raised prices by 6%, your sales would have to drop by 13% for you to lose money!
Businesses should regularly consider price increases. Here are some ways to make it easier.
Communicating an increase
Chances are, you’re more concerned about a price increase than your customers. More often than not, sellers have a greater issue with price changes than buyers. Customers are usually willing to pay a higher price for a product or service if you give them a good reason for doing so.
In fact, customers hardly ever shop on price alone – they usually base their buying decision on many other factors as well, such as quality, service, value for money, delivery times, and even methods of payment.
However, telling your customers about price increases can be a challenge. Can’t you just increase prices and hope nobody notices?
Unfortunately, this is not a good strategy. Customers will notice, and if you don’t give them a reason behind the change, as well as enough time to process it, they’re more likely to become frustrated and look for other options. If you really want to build loyalty with your customers (and who doesn’t?), you’ll treat your relationships with them as true partnerships and be open and direct about the increases in advance.
With that in mind, here are three ideas on how to communicate a price increase to customers
- New and Improved
If you can show that your product or service is being improved or enhanced in some way, talk about it. Something that’s better than before – especially if the change came about due to customer input and feedback or is necessary to continue your current level of quality – is worth talking about and customers will be likely to pay more for it.
- Create New Options
One way to soften the blow for current loyal customers is to create a different pricing structure altogether. Consider sending out an email message or postcard to your customers with a ‘VIP’ or limited-time-offer price, allowing current customers to lock in their current rate for a certain period of time by signing up or using a special code. This gives you the chance to increase prices for all your new customers and build loyalty with existing ones at the same time.
- State the Facts
If prices are going up due to increases in manufacturing costs, raw materials, packaging, labour costs, etc., make that clear. At the very least, CPI changes mean you should be reviewing your pricing annually. You don’t have to provide specific financial information. Increasing prices to cover your expenses while continuing to meet customer expectations and maintain a level of quality is perfectly legitimate.
A final tip: Don’t forget to clearly communicate the increase, reasons and timing to your staff – the last thing you want is to have your team members giving the wrong prices to customers or sending mixed messages about why prices went up.
Once you’ve devised a clear strategy and communication plan, adapting your pricing strategy is easy – and will NOT frighten customers away. They will stay with you, benefiting from the opportunities and choices your new pricing strategies made possible.
For help in reviewing prices, the impact of price changes on your financials, and advice on how to communicate a price increase, please contact us.