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 greater 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, and 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?

Common Pricing Strategies

There are a number of pricing strategies a company can employ. We’ll touch on three.

1. 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.
2. 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 in, will help improve revenues without changing the list price.
3. 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.

Purchase Your Assessment

Strategies to Support Raising 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.

1. 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
2. Give B2B customers at least 30 days’ notice and a chance to place an order at the old price
3. 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
4. The next-largest andmost  important customers should receive a personal phone call, either from their account manager or customer service rep
5. Provide a formal, written, personalized individual letter/email to all customer,s and not 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.

FAQ:

1. High-velocity SKU pricing: Increase prices on products that account for the majority of sales. The benefit is higher revenue impact; the risk is competitive response that could affect long-term market share.
2. Reduce discounting to capture more revenue from existing customers: Eliminate or reduce discounts that create revenue leakage. This can improve revenue without changing list price.
3. Surcharge approach: Keep base price the same and add a surcharge to cover increases (often positioned as temporary). When conditions normalize (e.g., fuel declines), it is advisable to drop the surcharge.

• Unbundle fees formerly included in the price while keeping base price the same (e.g., raise shipping or service fees).
• Bundle additional value into the offering to justify a premium.
• Shrink the offering while keeping the price the same.

1. Explain the reason: Be clear the increase is not simply to pad profits; tie it, as much as possible, to increased costs.
2. Provide notice: Give B2B customers at least 30 days’ notice and the opportunity to place an order at the old price.
3. Prioritize top customers: Ensure your largest and best customers receive a personal visit from sales leadership to communicate the change and rationale.
4. Call next-tier customers: The next-largest and most important customers should receive a personal phone call from their account manager or customer service representative.
5. Use individualized written communication: Send a formal, personalized letter/email to all customers (not a generic email blast). Treat this as a critical customer touchpoint.

Comments are closed.