Studies have shown that when volumes are stable, a 1 percent price increase generates an 8 percent increase in operating profit (and just the opposite holds true too). This impact is 50 percent great than a 1 percent drop in variable costs such as materials and labor. It has a significantly more impact (about 300%) than a 1% increase in volume. The goal of raising prices is to generate incremental revenue and profit without experiencing a loss in volume due to customer attrition or reductions in new customer acquisition which in the long term will actually result in reduced revenue, fewer customers, and perhaps the loss of goodwill. Should you decide to increase prices, you want to be sure it will not place you so out of relative position vs. the competition thereby encouraging customers to look elsewhere.
Before you raise prices, check the competitors prices, ask long-time trusted customers for their input (a good topic for a customer advisory board). Since raising prices is a tricky thing, how should a company go about it?
There’s a time and place to raise your price. Choose the right strategy.
Common Pricing Strategies
There are a number of pricing strategies a company can employ. We’ll touch on three.
- One approach is to focus on high velocity SKUs, that is, products that account for the majority of sales. The idea behind this approach is that a small change in a high velocity selling product will have a higher impact on revenue. The slippery slope here is the competitive response which could affect long-term market share.
- A second approach is to use pricing to capture more sales from existing customers. The idea here is to eliminate or reduce discounts provided to existing customers. These discounts are sources of revenue leakage and when plugged will help improve revenues without changing the list price.
- Another common pricing strategy is to use a surcharge approach. In this instance, the base price remains the same and a surcharge is used to cover the price increase. Surcharges are typically positioned as a temporary measure and the implication is that when things return to normal (for example when fuel costs decline), the surcharge will be dropped. When things do return to normal, it is advisable to drop the surcharge.
Strategies to SupportRaising Prices
If you’re exploring ways to raise your prices, consider one of these options as a way to begin the process.
- Break out fees formerly included in the price and keep the base price the same raising some of the smaller fees, such as the shipping charge.
- Bundle additional value into the product in order to charge a premium
- Shrink the offering and keep the price the same
Whichever method you choose, how you communicate the price increase is extremely important. Research reported by Sarah Maxwell in Pricing Strategy & Practice indicates that customers think prices based on costs are fair. Should you decide to increase the list price, these 5 guidelines can help you communicate the change.
- Be clear that the price increase is not just to pad profits, clarify the reason and as much as possible relate it to increased costs
- Give B2B customers at least 30 days notice and a chance to place an order at the old price
- Make sure your largest and best customers receive a personal visit from the sales leadership team to communicate the price increase and the reasons why it is being implemented
- The next-largest and important customers should receive a personal phone call, either from their account manager or customer service rep
- Provide a formal, written, personalized individual letter/email to all customers andnot an email blast. Remember this is another important touch point with your customers.
Let’s chat if you would like more ideas for your product marketing, product management and Marketing strategy.
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