Consumer prices in the United States shot up an amazing 8% in February, the biggest increase in 40 years! Gas prices, food, heating bills…inflation is all around us. And no one really knows how long this is going to last. Some are already saying that high inflation of 8-10% (or even more) could last for a few years! Many who are under 40 have never really experienced inflation before, so the notion of an inflationary experience is coming as a bit of a shock to many.
If you produce goods or sell products, you are certainly facing rising raw material and transportation costs (and supply chain issues) which are cutting into your profit margins. And if you sell services, given a tight labor market, as you’re having to pay your employees more to keep them happy, you’re also seeing profit margins erode.
So just like every company in the world right now, you need to think about raising your prices to at least keep up somewhat with that inflation. But it’s not fun to have to tell your customers that you’re going to raise your prices.
And even though the majority of your customers will be aware of the inflationary environment we are all in, most will still push back on a price increase, and that could even tempt them into seriously look at your competitors.
In reality, almost every business will have to go through the unpleasant task of raising their price at least once in the next few months. So the question then becomes…How can you do it in a way that limits your risk, and maybe even keeps your customers happy despite the price increase?
Over the years, we’ve guided companies in successfully navigating this mine infested challenge. So I’m going to share five creative pricing strategies for your consideration as you contemplate doing what you know you’re going to have to do anyways….take your prices up!
Yosi’s 5 Strategies to Help Justify a Price Increase!
- Raise the Price, But Upgrade the Product at the Same Time – That way, customers feel that they’re getting more for that extra money. You should look for ways of adding features, benefits or “bells and whistles” that cost you very little to add on to the product or service you’re offering, but create a “perception” of much higher value. This can not only mitigate the pricing risk and keep your current margin level, but sometimes it can even allow you to actually raise margins, despite your cost increases.
If you can tie the price increase to a “customer centric value narrative”, then you can not only avoid the customer’s wrath, but you may actually come out ahead of the curve. This concept was beautifully illustrated in a recent issue of Harvard Business Review where they provided a great example of how United Airlines raised the price of their United Club membership. Because United provided a vivid and compelling story for why the price was being increased that focuses on better customer value, and puts the customer at the center of the price increase story, they came away unscathed.
Here is how United explained the price increase…“To provide a more productive and relaxing experience, we’re investing over $100 million in renovating existing locations and building new spaces with expanded seating areas, more power outlets, and upgraded Wi-Fi. We’re also investing in a brand new complimentary food menu that you can find at most of our locations”. Great rationale and story, with the customer themselves featured front and center.
The important point here is to actually provide some additional value (albeit at a higher price for the customer) in order to eliminate the perception that they are paying more for basically getting the same product or service they’ve been getting till now (at a lower price.)
- Reimagine Your Portfolio With Product “Anchoring” – If you show a customer a $5000 piece of jewelry and then show them a $2000 piece of jewelry, the $2000 piece doesn’t seem that expensive because the “anchored” $5000 product is their cost basis. So develop a much more expensive version of your product, which will make the regular product appear to be “low priced” (despite the price increase).
- Keep Your Price Constant, But Give Less – For example, maintain margins by giving customers less ounces of product per box or per jar (people are less “quantity” sensitive than they are price sensitive), or “unbundle” the existing product by taking away a few features from the existing version, and charging extra for those features for people who want them.
- Strongly “Reposition” Your Brand – We do positioning strategies for many clients every year. Ask yourself…When selling or marketing your product/service, what do you say about it? What are your core benefits? What do you stand for and what makes you truly unique and special? And what do your key competitors say about their products? What is your value proposition that makes you worth buying vs. your key competitors? Are you healthier? More socially responsible? And how do you articulate that “story” clearly and succinctly so it’s easy for the customer to see what financial value it brings him/her. If the customer truly understands the “value” of what you provide, then even a 30% price increase can often be tolerable to them.
- Watch the Competition – Monitor your category and see what your competitors are doing on the pricing front. Sometimes, the best strategy is to simply wait till they take their price up, and then just follow them in doing so.
The Bottom Line
Increasing price is always a challenge, but in today’s inflationary environment, it is something that every management team has to very seriously consider…or they risk diluting their margins and profits. Try to think about how you can incorporate some of the aforementioned strategies in your thinking as you plan ahead.
So until next time, good luck and good selling in 2022…and please stay safe and healthy! Yosi