Setting fair pricing is one of the hardest aspects of starting a business. The holy grail, obviously, is to be making as much money as possible from your product while retaining a customer base that continues to see it as good value. Price yourself too low, and of course you’ll get sales – but even if you can score enough to open up that profit margin, you’ll likely be spreading yourself fairly thin, and the quality of service you’re able to provide could suffer as a result.
Price yourself too high, on the other hand, and the sales may not be there at all.
Both scenarios are commonly experienced by new startup businesses, particularly in those awkward early adjustment periods when so much is determined by a combination of research and (hopefully educated) guesswork. Bigger companies get it wrong, too – before glaring missteps were put right, Netflix saw its share value suddenly plummet by almost half after some particularly ill-considered moves back in 2011.
And even if a company does manage to hit that pricing sweet spot right out of the gate, at some point down the line most will need to consider raising prices anyway, whether it’s to fuel further growth or simply to adjust for higher inflation. When that time comes, the idea of moving the financial goalposts on your existing customers can be a daunting prospect. People quickly get used to paying a fixed rate, and nobody likes being asked for more. (This can be especially true of business customers, who may well be just as constrained by profit margin pressures as the seller.)
Still, it’s important to remember that there are several good reasons why buyers don’t necessarily go running for the hills at the first sign of a price increase. If a given product boasts a killer unique feature, comes from a company with a reputation for excellent service and support, or is perhaps just physically easier and more convenient to get hold of than a cheaper alternative, then it stands every chance of retaining a loyal customer base in the face of a price hike.
Moreover, there are ways to implement a higher pricing structure successfully that can actually end up yielding numerous benefits for a business and its client relationships.
Three key rules
The keys to achieving this are transparency, value, and stability – in short, customers must be aware that the price is going up, convinced that the product still offers value, and confident that the new price isn’t a sign of a recurring upward creep.
Why are these conditions so important? Well, let’s look at some common price rises that typically ignore them.
Bus tickets, candy bars and movie tickets are all good examples – precisely the sorts of universal, everyday items whose annoying year-on-year cost increases have effectively become an entire genre of small-talk in themselves. Of course, these types of products are already such established (and fairly low-cost) staples in our daily lives that customers tend to pay up despite the grumbles. Most products and services offered by startup companies, by contrast, will be sold into a far more nuanced marketplace where every client is battled for and losses can bite rather harder.
The reason we tend to find those candy bar-type price increases so annoying is that we hardly ever know in advance when the cost is going up, it’s seldom made clear why the product is ‘worth’ a new price or what we’re getting for it, and it never seems very long since the last time they added a few extra cents to the receipt.
In other words, the sellers usually fail to provide much in the way of transparency, value or stability.
If you want to avoid losing customers when raising prices in that kind of environment, the first and most important rule is to be transparent about it; in other words, make sure they know it’s happening in advance. Under no circumstances should a client first become aware of a new pricing structure when they get the bill – and of course higher costs should never be introduced mid-contract, even if you’ve already announced them elsewhere.
Note too that transparency in this context doesn’t mean over-explaining. Typically, you really don’t need to go into detail about your reasons for a higher tariff; most customers are only interested in the value they’re getting, and couldn’t care less about who bears what costs higher up the chain.
For especially valued customers, a direct and personalized notification of your intent to raise prices is well worth considering. A meeting or phone call is preferable to an email, which we all know can go unread. Moreover, email feels inherently more generic, when what you really want to do is impress upon the client how valued their specific custom is. (Indeed, the renowned American Express Global Customer Service Barometer survey reported in 2014 that, for more than 20% of respondents, ‘being recognized as an individual who deserves personal service’ was the key factor in companies exceeding expectations.)
The second important rule is to ensure the customer knows why it’s in their best interests to stay with you at the new price. When being asked to pay a higher price, it’s natural for customers to question what else they’re getting for their money – remember that you don’t need to say you’ll do more, but you may need to say more about what you’ll do. Again, avoid the temptation to break down costs at your end, even if they are what’s driving your tariff up. It’s far better and more convincing to sell your product based on what the customer gains from you specifically, and how it helps them achieve their aims.
Bear in mind that being the cheapest option isn’t necessarily a good thing anyway; competing in a pricing race to the bottom can often have a negative impact on perceptions of brand quality and prestige. Market share is important, of course, but market position is arguably even more so. If your product or service continues to offer value, you can trust customers to recognize that.
Finally, the third key rule is to do everything in your power to ensure that fluctuations in your pricing don’t come along very often. This may mean having to future-proof to some extent, perhaps setting prices even higher than you’d ideally like in order to avoid the need for further rises a short way down the road. A tough call, but so be it: studies show that even a relatively sharp single cost increase is less damaging to business-customer relationships than a series of smaller ones over an extended period.
The Harvard Business Review, in fact, used the example of annual vs. monthly gym memberships to illustrate this very principle – it showed that people making smaller, more regular payments tended to exercise more often, because they remained more acutely aware of costs than those who made a single larger payment, the impact of which faded much more quickly. When a business puts up its prices, the latter effect is preferable, resulting in better long-term customer retention rates than when prices are repeatedly nudged up in smaller increments.
Oh, and once your new prices are set, do be sure to eradicate all traces of the old ones – being seen as consistent is a huge factor in achieving that all-important air of stability, so make sure that all web and advertising platforms are quickly updated to reflect the chances you’ve made. Clients will quickly retreat if they’ve spotted an attractive price quoted somewhere which proves to be outdated on further investigation (the Global Customer Service Barometer also spotted that nearly a third of respondents ranked ‘delivery of promised value at the right price’ as their single highest priority).