Costs are rising, competition is becoming more and more relentless and companies have to reach for the usually not very popular solution - to make things more expensive. There are several ways to raise prices and not discourage customers. You can even avoid unpleasant discussions, condemning a product or service to unsaleability or unnecessary additional discounts.
In this article I'll show you how to do it. And it will be only minimally painful. But with good results. No excel, no margin squeeze. There's another way. Remember, working with price is all about attitude. To the market, to your competitors, to your customers. To the value you're selling.
Why raise prices
You already know how to set the price. But what about its growth? Don't think of it as an unpleasant step that makes you sick for a month ahead. There's a reason for the increase and it can be a strategic advantage. I personally see three basic reasons for price increases:
● Inflation and rising costs: the cost of energy, materials and people has risen in recent years. Don't try to stick it out on margins and maintain the original price.
● Growing quality: are you investing in improving your product? Then don't be afraid to get paid for it, innovation must be profitable. Along with that, communicate why it's happening and why customers should keep buying.
● Need for business development: same song. Expansion into new markets, better customer service, more qualified employees. Make it more expensive, then you'll have additional resources to make those changes.
I recently invited Dominika Špačková, owner of Valoa Strong, a company that has been involved in pricing for a long time, to my podcast Zážeh. According to her, pricing is a key factor that can fundamentally affect a company's profitability. She stressed that the right pricing can lead to a doubling of turnover and a tripling of profits. Isn't that a huge potential?
How to approach pricing
Now you know why the price is going up. But do you know how? Every business is different, so choose a pricing approach that fits the specifics of your business.
Cost-plus pricing
This approach is one of the simplest and most straightforward. The price is set as the sum of the cost of producing the product and the margin added. It is a model typical of manufacturing firms that can easily determine the cost of production.
Benefits: simplicity and transparency.
Cons: Does not take into account market demand or competition, which can lead to loss of market share or low profitability.
Dominika Špačková adds to the disadvantages the threat of the product not being marketable. Sometimes managers include all costs in the price, raising it to a level that is significantly above the price of the competition, and thus sinking the product or service.
Value-based pricing
Here the price is based on the value to the customer. If he sees more value in your product, he is willing to pay more.
Benefit: Possibility to achieve higher profits.
Cons: Measuring perceived value can be complex and requires an understanding of customer preferences.
Value-based pricing is key for companies that sell services. It enables better scaling of prices and adaptation to customer needs.
Competitive pricing
This is where competition comes into play. This approach is common in highly competitive industries where price is one of the main factors influencing customer choice.
Benefit: Maintaining competitiveness.
Cons: Risk of price war and margin squeeze.
Choose your strategy
Responsive approach, thoughtful timing and transparent communication. This is the
basis not only in a partnership, but also in a business relationship. There are different strategies for raising prices, but I would personally choose between the following:
Gradual price increase
Skip the leaps and bounds and instead rely on small, regular steps. This is the only way customers will accept the price more easily. Try Dominica's recommendation and increase the price for new customers first, and tell existing clients well in advance.
Price discrimination
Loyal customers will receive exclusive discounts, while new customer segments will pay a higher price for the new service. You can even segment your clientele and offer different levels of service that match the needs and willingness to pay of each segment.
Increase in value
If you raise prices, add some value for the customer at the same time. It could be an extended warranty, a subscription service, better service or a new product. Customers are more willing to accept a higher price if they get something extra in return. For example, one company offering technology solutions increased the price of its services by 15 percent, but added 24/7 support. And that's just something customers in this industry appreciate.
You can make it more expensive. But you have to communicate
Only through open and thoughtful communication will you avoid unnecessary negative reactions. And not accepting the new price. Keep these three key points in mind:
● Be transparent. Be honest and open about why you are raising prices. Explain to customers what costs are rising and what product improvements they can expect.
● Involve customers. Use questionnaires and ask for feedback. This is the only way to find out what customers really want and what change they are willing to accept.
● Report it in time. Inform loyal and long-term customers of changes well in advance so they have time to prepare.
Increasing prices may be a necessity for your business. But it's also an opportunity - to grow and improve your services. The key is to find the right approach that fits the specifics of your market.
According to Dominika Špačková, the correct setting of prices and their regular adjustment according to current market conditions is a necessary step to maintain competitiveness. And I agree. What about you?
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