Rafi Mohammed

Don't Let Customers Freak Out Over Price Increases

Posted on February 17th, 2012 (0 Comments)

Reprinted from the Harvard Business Review website.

Last year's business pages were filled with episodes of consumer outrage over price hikes. Within hours of Verizon's announcement of a new $2 "convenience fee" for one-time payments, 130,000 people had signed an online protest petition and the FCC had expressed its concern to the media. The President of the United States criticized Bank of America's planned $5 monthly debit card fee by saying, "This is exactly why we need [a regulator] whose sole job it is to prevent this kind of stuff from happening." Three and a half months after announcing a price increase in July 2011, Netflix had lost 800,000 customers and its stock nosedived from $291 to $75. In response to this uproar, Verizon quickly reversed its price hike and Bank of America eventually did too. Netflix stood firm on its pricing decision and its stock has since inched up to $124.

These episodes show how difficult it is for companies to mess with pricing. When I spoke with a CFO about this recently, he said: "Rafi, the key is to not let a price hike become emotional to customers, because that's when they become irrational and ultimately leave."

There's enormous truth in that insight. With the economy on the rebound, chances are that your company will consider a price increase this year. Following the tips below will help ensure that your price hike doesn't result in drama and unwelcome media frenzy:

Employ Bedside Manners. No one likes to pay more, so explain why you're raising prices. Gain consumer acceptance with justifying reasons such as: (1) Costs have increased, (2) We haven't taken an increase in several years, or (3) We kept prices low to help customers weather the recession. Bank of America, for instance, should have emphasized that the Durbin Amendment to the Dodd-Frank bill reduced fees that debit card issuers receive from 44 cents to between 7- and 12-cents per transaction. Thanks to our elected officials, now this 73% to 84% drop in fees has to be made up.

Offer Choices. No one likes being cornered with a "take it or leave it" ultimatum. A price increase is more palatable if there is an option to save money. Even if you don't expect anyone to take the cheaper option, offer it anyway. Consumers appreciate choices and use the lower price as an anchor reference to base buying decisions from: "for only 10% more, I get all of these additional benefits." Netflix wouldn't be in its current crisis had it in essence said, "We'll continue to provide all of the content that you have today at our pledged price, but if you want the additional great content that we are paying billions of dollars to acquire, you'll have to upgrade to our silver and gold packages."

Keep Your Word. Only apply price increase to new purchases and renewals, and grandfather existing deals under the old policy. Verizon tried to hike prices on all of its existing contracts. That's changing the deal, and it's not fair.

Emphasize Value. Make it a point to reinforce that even with the price increase, your product or service is still a great deal. Even with a higher price, for instance, Netflix is usually cheaper and arguably a more robust service than HBO.

Everyone Else is Doing It. Pointing out that rivals also are raising prices makes your actions seem fairer to consumers, especially if your price increase is lower than the references that you highlight.

P.S.: You'll Make More Money Too (B2B situations). While I don't condone it, most retailers set prices by simply marking up their wholesale costs. Thus, if wholesale prices go up, retail prices do too. If demand remains constant or minimally reduced—retail profits will rise. The key is to demonstrate to retailers (and help ensure) that consumers will accept the price increase.

At most companies today, rolling out a price increase involves a few quick edits to an old press release or a letter to buyers. But times have changed and so must your tactics. As a result of an increased price sensitivity and proclivity to vent via social media, it is now essential to develop and execute a well-orchestrated strategy to successfully increase prices. Follow these tips to increase your odds of a profitable result.

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