Historically, price changes were so common that customers expected it when a new year rolled in. Today is a bit different – price changes are rare and unpopular. With the market currently in hyperinflation, it is more timely than ever for companies to investigate price increases to keep up with higher input costs. The question becomes, how can you convince resistant customers to accept an increase? One wrong move can produce costly consequences, as many companies have figured out. With our experience in implementing price increases for clients, we wanted to share four best practices to keep in mind:
- Set your price based on facts
- Equip your sales force with the tools to communicate the price increase / address objections
- Manage your communication process with a well-crafted message
- Predict competitive reaction
1) Setting a Fact-Based Foundation
Before any price increase occurs, you first must conduct a detailed landscape analysis to build your foundation to answer why your price is increasing. Three key components to focus on are the general market sentiment, your customer sentiment, and the value your offering provides to get an external and internal perspective on your price increase’s suitability.
One way to understand the general market sentiment is to track the historical prices of your products along with competitors’ and compare it with a broad market measure like the Consumer Price Index. If you see that your prices have not kept up with the CPI even with a 5% increase, this gives you an indication that your price increase is fair (and customers would agree).
b) Transaction Analysis
The best way to understand your customer is to utilize your transaction data to analyze customer purchase behavior. For example, you can leverage the data to create customer and product segments, based on behavioral attributes like average spend, frequency of purchase, etc. You can then model willingness to pay (elasticity) for each segment helping you identify areas where pricing leverage exists. Moreover, your transaction data gives you insight into how your customer segments have changed over time, so you know which segments to prioritize and invest in while also positioning your pricing to account for future changes. Setting your pricing based on the needs of the customer will ensure successful execution in the market.
C) Value Add
In addition to understanding your customers, you want the customer to understand you too. More specifically, you want the customer to understand the value your product or service adds to their life. There are two ways to assess value – perceived and financial. Perceived value is how customers feel about your offer while financial value is the business case justifying the use of your offers versus the next best alternative. To accept your price increase, your customers must clearly understand both the perceived and financial value gained from your product or service. For example, if your customers value quality, reliability, and responsiveness, these attributes must be highlighted in your offering to help users see what incremental value you offer. Otherwise, your customers may feel your price increase is unwarranted since they are not considering your value adds.
2) Equipping Your Sales Force
As the front-line representatives for the company, your sales force needs to align with the price increase to ensure the company continues to run smoothly. They need to believe that the price increase is fair and should be trained to confidently communicate the message to customers. Senior management should have an aligned strategy on how to ensure their sales force can handle any problems that may come from the price increase. For example, if a client responds negatively to the price increase and elevates the issue to management, there should be internal alignment on what the next steps are. You can conduct mock interviews with your sales force, simulating various customer reactions to the price increase with low, medium, and high resistance. This helps your team understand how to communicate your price increase effectively. Sell stories should also be prepared for your sales force to standardize the messaging around the price increase and ensure consistent delivery.
3) Effectively Communicate Your Message
No one likes a sudden price increase, especially customers. To successfully implement a price increase, you should let them know in advance what is to come. Your sales force should be communicating with customers about any price changes ahead of time. Further, they should be available to answer any questions the customers may have during the price increase period. If you anticipate some or all of your clients may not yet be receptive to the price increase, consider increasing notice periods giving them extra time to internalize the increase.
4) Predict Competitive Reaction
Companies must also consider how competitors may react to your price increase and plan a suitable response. If competitors follow your lead, what would that mean for you financially? What if they do not follow your lead? You can always run different simulations to understand competitor reactions and devise playbooks accordingly. For example, you can take a pilot price increase on a subset of products to test the waters before layering on the increase across your portfolio. Some companies hold a press conference a couple of months ahead of a price increase to see if competitors follow or not. If they do, then the price increase is followed through. If not, select mitigating actions can be put in place.
Post-Price Increase Analysis
Once a price increase has been implemented, you must follow up with customers – your success depends on it! Pay attention to what types of reactions your customers have with the price change. In fact, you may even realize customers did not even notice the price change, which gives you an inclination about how future increases will turn out. In addition to monitoring customers’ reactions / complaints, you should always understand actual post-performance versus forecast to verify the elasticity across each customer segment and adjust where necessary. One thing to note is that sometimes price increases do not last (or ‘stick’). To avoid this, be sure to avoid these 5 pitfalls when implementing a price increase.
If you would like Revenue Management Labs to help you with your price increase initiatives, get in touch today!