How to Raise Prices — The Smart Way

Prices are going up everywhere you look; the gas pump, the grocery store, and now on main street. At least that’s according to the latest small business owner survey conducted by the National Federation of Independent Business. They found that more than a quarter of small business owners have either increased prices or plan to do so in the near future, which is the highest amount in 28 months.

Despite an improving economy, such price hikes could spell trouble for those who have resorted to discounting during the recession. Why? Because these “discounters” have trained consumers to shop on price. As a result, price has become one of the most influential factors in making a purchase.

According to SymphonyIRI’s latest MarketPulse Survey, 64% of consumers state that price has become a more important consideration than convenience in brand purchases. Another SymphonyIRI report released in late 2010 found that 77% of consumers were making store choices based on which retailer offered the lowest price on needed items.

What if you are one of these “discounters”? How are you going to increase prices without losing all of your customers? Here is how to raise prices the smart way.

1. Be Honest

If you are losing money on every sale, be upfront with your customers. Sure you may lose a few, but the majority of customers understand that the point of a business is indeed to make, and not lose, money. Five Guys Burgers & Fries employs a pricing model where they set their food prices to reflect their costs. “If the mayonnaise guy triples his price, we pay triple for the mayonnaise! And then we’ll increase the price of our product” explains founder Jerry Murrell.

Honesty is key here. If you tell customers that you are increasing prices because your costs are going up, but you have ulterior motives (such as padding your profit margin), then you are certainly going to reap what you sow.

2. Tell Customers

Some may disagree with me on this point, but whenever you increase prices, I think it is always a good idea to communicate the price increase to your current customers. First, no one likes a surprise price hike; if you increase prices overnight with no warning you are likely to piss off a lot of people. You need to make sure you give your loyal customers plenty of advance warning that prices are going to be increasing in the future.

You also need to explain why prices are increasing. I was a loyal State Farm customer for 8 years. I never had any issues with them and was completely satisfied with my auto insurance. But that changed very quickly. Despite never being in a wreck or getting a ticket, my premium gradually got more and more expensive; Over the course of two years, it went from about $400 every six months to over $600 every six months. I asked my agent why and he couldn’t give me a straight answer. No problem, I switched to All State. Please don’t make the same mistake of communicating the why.

3.Add Value

An increase in price should be accompanied by an increase in value whenever possible. Adding additional value to your product or service will help customers justify paying the new, higher price. Some examples of ways to add value are:

• Free or upgraded shipping
• Offer educational ‘how-to’ classes and videos
• Risk-free return policies
• Complementary service (sell dress shoes? Offer free shoe shines for life)
• Include a warranty

In each of these examples, you can see that the value to customers is much more than the cost to provide that value. For example, a 30 day no-questions-asked return policy on a piece of software may be worth shelling out an additional $50 to customers, whereas it costs you basically nothing to provide this policy. The great thing about adding value is that it has a halo effect (increased profit margins, product differentiation, word of mouth, etc.)

Summing It All Up

Of course, when it comes to pricing, you will also want to consider competition, customers, costs, and external factors such as the economy. However, over-relying on any one of these would be a mistake. The key to setting your price is understanding—and shaping—the value that your product or service creates in the lives of your customer.

Well executed price increases will not only help you retain your current customer base, but by adding value you will better differentiate your brand and attract more customers in the future.