You may be at the point in your company that it’s time to change prices.
Understandably, this can be intimidating.
You’ve done the work to create thoughtful pricing and packaging changes. You focused on creating pricing that aligns with your customer’s willingness to pay. Now it’s time to execute. So what can you do to ensure a successful pricing transition?
It is a question we have helped a number of our clients successfully navigate. Luckily there are useful strategies to go about price changes effectively. The focus is not only the commercial benefits of pricing changes, but to also ensure relationships with existing and prospective customers are strengthened.
In order to simplify the process and help ease the stress of pricing changes, let’s start with making sure your customers understand the changes being implemented.
Transparent communication is a crucial step in any pricing change.
Customers value companies that they perceive as honest and open about their business practices.This includes any changes to price.
Effective price change communication should be focused on information. This information should focus on helping customers answer three core questions:
- Why is the change happening?
- What is the nature of the price change?
- When will the price change taking place?
- If the customer has additional questions, where can they go?
Never wait to let customers know about changes after the fact.
While you want to be mindful of the potential financial impact any price change will have on your customers, this also does not mean you have to treat price changes as an unfortunate mistake. Your price change reflects changes in value – ideally more – that is given to the customer. The price change is a reflection that you understand that value and are willing to defend it through your pricing.
Customers should see a benefit from the changes. This can be seen through investment for enhanced content, maintaining important services such as customer support, new features, better employee wages, etc. For one of our clients, part of the reason for the change is to further invest resources into serving under-represented communities.
That is the goal here — we want customers to feel in the loop about where their money is going in order to keep their business.
In this process, it is important to remember that not all customers will be accepting of this change — and this can actually be a blessing in disguise.
Accept some customers don’t like change
The thought of upset customers seems scary.
Price changes will inevitably lead to some unhappy customers. There may even be some customers who are unwilling to pay the new prices and will leave. The balance you are trying to achieve is maintaining a customer base who are more profitable and remain aligned to the value exchange – the prices they pay to the value you deliver.
For some companies, a price change is a tool to assess how aligned customers are to their value proposition. This is a way to recalibrate the customer base.
It is a simple question of — do you want to support customers who are so price sensitive that changing prices will automatically lose their business? The answer is probably not. Why? Because these types of customers are often expensive to maintain. This can include higher utilization of customer success or support teams to higher complaints on social media or other channels.
While you may not be able to only choose your best customers, you can definitely find ways to strengthen your customer base that’s more aligned with your value proposition.
There is a tendency for some companies to want to do one large price change. One driver is so they don’t have to do it again.
In practice, price changes do not need to be drastic. Price changes should be thoughtful and methodical, and in some cases gradual. Gradual changes can space out price change over time, or the change itself can be announced and applied over time with different customers and products.
Gradually introducing changes can help ease customers into changes and follow your journey to create more value for them.
One example is Google change to calculating storage consumption on their Drive product. Previously, Google family of productivity products (e.g. Docs, Slides, Sheet) did not apply towards storage limits. In late 2020, Google announced these products will count towards storage limits, thereby accelerating storage consumption and moving customers closer to paid plans. To give customers – personal and business – sufficient time, they were going to roll out changes over a 14 month period.
Companies can also gradually change prices by introducing these changes on a smaller scale — to a select group of customers. These more gradual changes are used as price tests and assess how different customer segments may react to the changes on a larger scale.
Just as you should be methodical, price changes can also be applied selectively.
Not every product and every customer warrant a price change. If you created a customer segmentation linked to pricing, then this should be used as the basis for selective price changes.
Starbucks is constantly changing their menu prices and they usually do so only on select products: food, drip coffees, espresso drinks, frappuccinos, or even specifically targeting sizes. For example, Starbucks may change pricing by a few cents for only their small sized, brewed coffee drinks. There is a specific customer segment where this price change may be potentially meaningful, and will how this segment reacts and how this impacts sales at select retail locations.
Netflix also does this by choosing to increase prices on certain plans they offer. This year they decided to make pricing increases to their standard ($12.99 to $13.99) and premium plan ($15 to $17.99) while keeping the basic plan ($8.99) the same price.
Selectivity can help ease adoption for pricing changes, while being thoughtful about what areas would respond the best to these increases.
We just went over a few ways to effectively change prices while minimizing potential negative reactions from customers. .
Within each of the strategies, the focus is on the customer and how best to engage that customer for the changes your company needs to make.
There are many examples where price changes go horribly wrong. Common reasons include late communication of a price change and forcing customers to adopt not only new pricing but pushing customers out of existing plans and products. Another design issue is that while price changes for a product is correct, companies do not close off potential loopholes or other ways of circumventing paying “full price”.
Ultimately price changes should center on benefits, and does not have to mean losing customers as a result.
Through deep research, pricing-centric customer segmentations, and a comprehensive communication plan, the price change should be mutually beneficial, ultimately leading to greater growth for the company.
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