Common thinking: It is more difficult to increase your price
The common thinking goes: it is indeed difficult to increase your price — certainly much more so than lowering it!
Wrong. Here’s why.
Decreasing a price may seem easier as you will have less pushback from your customers, sales teams and distribution network
Everybody likes a lower price. Right? But it comes with problems, in the long run.
Short term: A lower price means you don’t have to spend much time explaining the benefits to your customers, making it much easier for your salesforce.
Mid/long term: the damage could end up being of the same magnitude as with a price increase, if not bigger: if you don’t explain thoroughly your reasons for changing your prices, customers’ trust and confidence in your company will decrease. It could increase their perception of further unexpected changes to come, and people hate the unexpected. Failure to explain your changes will make you seem less reliable.
What’s more, decreasing your price creates the perception that the previous price was too high and generated more profit for you at your customers’ expense. We all had that experience to find out afterwards that we paid too much. The memories and the feelings linked to this experience are strong and they last for very long. Expect tougher demands for a lower price in your next round of negotiation.
Other issues with price decrease: brand image damage as the perception on quality is partially linked to the price level.
The solution: tie your price increase or increase to a change in customer value or an external factor out of your control (ex: cost). Always explain thoroughly what you are pricing (the criteria) and why you changed it. Or, as for price increase, link the price decrease to a new version of your product with lower perceived value.
See the previous article on the 7 steps to follow to increase your price with success: https://www.elithan-consultancy.eu/were-being-squeezed-right-now-how-should-we-handle-the-price-increase-of-our-raw-materials/
Loose vs tight relationships. It is easier to apply a price change in a loose commercial relationship than in a tight one
A loose commercial relationship happens when you purchase a product infrequently, perhaps only once. This, for example, could be a holiday or a car, insurance products, household furniture, a new tool, or special food items… For these types of single-buy items, increasing the price is not an issue as customers compare prices at the time of purchase — and they compare them with your competitors’ prices, not with your own previous prices. You might end up selling fewer units because fewer people can afford them, but it won’t be because people are comparing your new price to your old one.
In a tight commercial relationship, like with repeat purchase, licenses or subscriptions, people will first compare your new price with your previous one. Remind customers about the value you’re providing and explain your price increase by referring to external factors. Give them sufficient time to adjust their subscriptions. The last thing you want is for them to feel like they are hostages of your unexpected price increase.
“Our customers have no other choice than working with us, so increasing a price is easy.”
“We operate in a competitive market, but our offer is so attractive that we have achieved a near-monopoly situation where there is no (good) direct alternative for our customers. Increasing prices has been fairly easy for us as we are in a strong position and customers cannot run away.” Yes, indeed many companies in this situation think so. This is also the case when customers cannot easily switch to another option because you’ve created lock-in. Customers have no real other option, or switching is painful, costly, or takes too much time.
Beware! Yes, you’ll be able to raise your prices, and although customers may complain, they’ll have to ultimately accept it. Your profit margin will show very positive results — but only as long as customers have no other choice. As soon as they find an alternative, you can be sure that they’ll run towards it. Why? Because they’ll feel that you are abusing your near-monopoly position at their expense. Resentment will creep in, and once customers feel taken advantage of, it is very challenging to change their perception. The solution? Spend the time necessary to explain your price increase to your customers until they somehow accept, or at least understand your decision.
“We have no such problem as increasing or decreasing prices: they are fixed.”
Yes, you could be tempted to set your prices for a long period of time. They should be reviewed regularly (at least once a year, depending on your industry and product), to match the latest market situation (customers, competitors, suppliers, regulatory environment, etc). If you don’t set the price revision on the agenda proactively, be sure that when you’ll have to do you won’t be prepared.
To summarise, in a tight commercial relationship, whether you are considering a price increase or decrease, what matters most is how and why you change your prices, and how you communicate these changes. Make great efforts to make sure your customers understand why your changed your price. Make sure that you always appear predictable and trustworthy: announce changes early so customers are not caught off guard.
What was your last experience with a price change? We’d love to hear about it.
Elithan Consultancy is a consultancy and interim management company that helps B2B technology
companies create, capture, position and launch customer value. Elithan Consultancy helps you make
informed and better decisions that lead to lower business risk and more positive outcomes.