Rafi Mohammed

How to Raise Prices: Lessons from Radiohead and Panera Bread

Posted on February 1st, 2011 (0 Comments)

We are in a “trifecta” market environment where companies have to raise their prices: (1) After allowing margins to droop during the recession, companies are now seeking to recoup profits during this hopeful upswing, (2) Similarly, after years of capping wages, wage rates are starting to increase, and (3) Input costs, in particular for commodities, are on the rise.

So what do Radiohead and Panera have to do with increasing prices? They both have experimented with “pay what you want” pricing strategies but ended up with very different results. Lessons from these experiments can be helpful in discerning how to get consumers to pay more…even voluntarily.

In 2007, Radiohead simply announced to fans that they could download their latest CD (In Rainbows) and pay whatever they wanted. According to ComScore, the average fan paid $2.26 (the list price of CD downloads is generally $9.99).

Panera has opened three non-profit restaurants that provide suggested prices, but ultimately allow consumers to pay whatever they want for their meals. Its results are starkly different compared to Radiohead’s. At Panera’s Portland, Oregon restaurant, 60% pay the suggested prices, 20% pay more, and 20% pay less.  

The same payment strategy, but two very different consumer reactions, what’s going on? Here’s how you can leverage these results to get consumers to be more amenable to your price increases:

  • Avoid anonymity - personally communicate the price increase. Panera found that having a “greeter” was important to communicate the pay-as-you-go strategy.
  • Communicate reasons for the price increase. Consumers are more amenable to price increases due to cost increase justifications: it’s easy to understand that it costs “real money” to make and serve Panera food as opposed to a virtually costless download of music from a famous (and presumably rich) rock band.
  • Anchor your prices - be specific. Radiohead cavalierly announced, “Pay what you want.” While Panera also says, “Pay what you want,” they clearly list the normal retail price. In your discussions with customers, explain in detail (oil prices have gone up by 20%, for instance) why you are raising prices so they better understand.

Price increases are a necessity in 2011. These lessons from Radiohead and Panera can help you successfully price for profits and growth.

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