Raising prices can increase profits.
It’s easy to cut prices – your customers are happy, your sales people are happy – and if you do it right, your sales volumes go up. But your CFO knows the truth – your profits are dropping and you’ll need to increase volumes A LOT to bring the profits back at a lower price! But what happens when your pricing and customer research shows that you are underpriced and over delivering? It’s a great position to be in.
So how do you communicate the increase in pricing without losing all your customers?
1. Repackage and Reposition Consider adding additional features and services to the basic product and create a new model. You could include technical support or accessories that were previously separate items. Make sure you understand the value of each item you are adding to properly increase the price. This value of each individual component can be estimated through proper market/customer research. Reposition the old product as a less attractive offering – either by raising price or reducing functionality. Taking service out of the old offering and charging separately for it may make the new offering much more attractive. Customers now have a choice and are less likely to jump ship. Create new value propositions and marketing collateral. Develop a clear positioning of the portfolio and include facts as to why the new premium product offers the best value and is positioned and priced where it is.
2. Change the Product Structure Change the way you offer the product. For example, instead of selling the copy machine, can you charge for each copy made? This allows customers to change to a per-use model which may be beneficial and also allows them to move capital expenses over to operational expenses. (Their CFOs will like this.)
3. Communicate the Value If you have a compelling value proposition, a proper communications campaign may ease the customers into the new pricing realm. It is important to announce pricing increases as early as possible and ensure that your entire company from sales channel to top executives can pitch the same message. Have 1:1 discussions with your key accounts. Consider running a sales contest to get the momentum going. It’s also imperative to monitor your competitors’ behavior. Your competitor may choose to lower prices at this point just to grab market share. You don’t want to overreact and get into a race to the bottom. In the best case scenario – they will raise their prices as well and everyone wins.
Proper pricing takes research and a clear business model. Doing the work will help you drive the increase in profitability you deserve.