All companies have to adjust their prices at some point. It’s rarely a matter of if, but when.
With rising inflation, higher sales and marketing costs, changes in consumer demands, and supply chain disruption; there are many drivers for a price change.
This should not cause anxiety or create fear that delays important changes for your business. Instead with proper assessment and planning, you can navigate price changes that capture opportunities including increase in revenue, bookings and profit, while actively mitigating risk.
Before reviewing how your company can prepare for a price change, let’s start wit h why your company might consider a price change.
Why your company should consider a price change
There are many reasons why your company might consider doing a price change. In our experience we see price changes fall into one of three categories:
- Proactive value capture
- Proactive defense
- Risk mitigation
Let’s explore each in more detail.
Proactive value capture: Capture locked value
Your current pricing may be a result of your company’s legacy pricing approach – follow-the-leader pricing, cost-plus pricing, or guessing (it’s ok, many companies still do this).
Since you initially launched your pricing, you may have created a clearer strategy. A strategy that lays out what your pricing and business model is designed to achieve for your company. You may have also discovered that your customers find more value in your product. In fact they find your product is unique, differentiated and invaluable to their lives or work.
A price change is an opportunity to align the value you create and deliver to your product and your customers. The potential impact of aligning these factors? Greater revenue, increased bookings and cash flow, and higher profits.
A proactive approach is intentional and strategic, but has long lasting financial and go-to-market potential.
Proactive defense
For some companies, a price change is a defense strategy. The defensive posturing is driven by several different factors.
Some companies see an increase in competitors in their industry. While not an immediate threat, making pricing changes now is a proactive move to establish a clearer defensive moat.
For other companies, they may be experiencing softening demand, but a deeply committed and loyal community of customers. For these companies they may opt for a proactive defense to stem potential decline in less loyal customers.
Adjusting price points, packaging and offers, and updating the value proposition for the company, product and pricing supports a defense strategy. This not only makes changes in response to shifts in the market and customers, but captures business benefits including increased revenue and profits.
Immediate threat: Risk mitigation
Some companies face immediate threats to their business that require price changes. These threats can include the fast growth of competition, sudden loss of customers, and increased costs including customer acquisition costs.
A price change – both up and downward – is one way a company directly addresses threats to the business. One common way is through a price decrease. This was a tactic companies like Tesla used toward the end of 2022 to increase demand and raise pressure on competitors. This helped Tesla to increase units sold by an additional 20,000 vehicles (or 4%) quarter-on-quarter and was a record quarter for the company. For these types of price change, the question then remains for the company as to whether further growth or traction is sustainable without additional price changes.
Those companies that see threats as an opportunity, view price changes as a way to reposition the company, its product and value proposition. In such a scenario, a price change can also be used as a way to adapt financial outcomes – revenue, bookings, profit – to respond to the threats. Assuming the company has not done so already, this can also give the company room to adjust its overall business strategy and align the pricing strategy to changes to future direction.
Pricing change guidelines
Once your company identifies why a price change is needed, we recommend using these guidelines as your company designs its price change strategy.
Double down on value
One of the most important rules when doing any price change is to double-down on value. Your prices do not sit in a vacuum. They are tied to the value your customers experience. Making any price change will immediately raise the value question.
This is true for price increases and decreases. This is also true when pricing packages and offers are adjusted or eliminated.
If you don’t know your value, and the value you need to focus on, your company will face challenges in defending the price change. This can negatively impact reputation, financial outcomes (e.g. revenue, profit), and longer-term competitiveness including the ability to win/acquire new customers.
If you are clearly aligned on the value your company delivers, the product, the customer and the price, your price change will have some positive tailwinds to support its success.
Valuable transparency
A key component of successful price changes is transparency. This goes hand in hand with how you communicate your value.
Customers generally do not like disruption. A price change causes disruption. While this may be necessary for your company, it is important to explain to customers current and new, why prices must change. Your company should be transparent in why, but also why the substantial value exists and what new value the customer can unlock (e.g. unused feature).
For example, when Neflix raised their prices in 2022 they did not cite the changes due to inflation costs, as many other corporations have, but that the “investment” made for their users will help the company continue to deliver high quality in house productions such as “The Crown” and “Bridgerton”. The way they communicated this price change was to help customers feel they collectively contributed to the production of Netflix’s award winning shows and movies, and in order to continue a price change was necessary.
Netflix’s strategy increased the value of their relationship with the customers, and most importantly eased the transition to new prices.
Gradual Selectivity
As with most changes, adjusting prices gradually can make the transition smoother for both the company and the customer.
Price adjustments do not need to be a radical change that will ward off any other adjustments in the future. Quite the opposite. Your company is communicating that the value you deliver to your customers has increased or unrealized. This additional value delivered can be captured in the current price change or gradually over time.
This is strategic and intentional, and often done by companies that are proactively capturing value or taking a proactive defense strategy. Gradual selectivity is also done by companies that are actively managing their pricing strategy and is aware of the magnitude and timing of price changes.
One example is selectively adjusting prices for targeted customer cohorts and segments. For some customers, a price change today is not needed or appropriate. For another set of customers, there is a misalignment between current prices, the product and the value received. It can be more prudent for your company to gradually change prices within the customer base then one universal price change. Methodically adjusting your prices will have positive long-term effects on your customer retention.
Final Thoughts
Each company is different and therefore price adjustment strategies are not uniform for everyone. Differences exist whether your company is a leader in the market or a new entry startup.
It is no surprise that consumers have difficulty with change, especially when it comes to prices. You should not let this influence your pricing changes, but instead view it as a chance to recalibrate and strengthen your value, your positioning and your customer base.
Applying the guidelines we outlined above will give your company greater confidence that the customers who are aligned with your value exchange – the prices they pay for the value you deliver – will not be deterred by pricing adjustments that are in the best interest of the company and the consumer.
If you’d like more information on how to adjust your pricing, sign up to our weekly newsletter or contact us directly with any questions you may have.
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