How to increase prices without losing customers

From Croner I

With the cost of raw materials and shipping showing no sign of reducing, many smaller enterprises have come to the end of absorbing these increases. We look at what strategies businesses can use to increase their prices and by how much.

With an economy with slow growth and inflation dampening consumer spending, businesses that need to raise their prices must have a strategic plan that enables them to shift their prices without damaging their brand. Whether to pass on cost increases in your business's supply chain is a question many enterprises are asking. According to the Office for National Statistics (ONS), 42% of businesses report that they have yet to pass on rising costs to their customers.

Keeping the price of your business’s goods or services static may be impossible. In this scenario, if a price increase is needed to protect margins, how should this be carried out, and what potential issues must be mitigated?

Looking closely at the cost inputs your business needs to manage will be the first research to carry out. Here, components such as energy prices will play a significant part in identifying where increased costs are located. Indeed, the SME Outlook Report 2022 from Fleximize suggests that over half (58%) of businesses see energy prices as a significant influence on their costs.

It is essential to clearly communicate the reasons for your price rise to customers or commercial partners. Simply raising prices without explanation will damage your brand and reputation in your marketplace. The key is to act early. If your business needs to raise prices, communicate this as early as possible. This will give everyone time to understand the price increase and what this could mean for their enterprises, as your business doesn't exist in isolation, but is part of a commercial ecosystem.

Speaking to us, Ion Farmakides, Managing Director of Pearl Lemon, says understanding the factors impacting price rises is essential to appreciate: “Increasing prices should be rooted in your product or service value. The nature of your business, the market trend, and your ideal profit margin or ROI.”

Farmakides continued: “Find the sweet spot between your price tag and your market. You’d want to target the market that could see the product or service as a reasonable purchase. For instance, you’re selling tents and initially you want to sell it to homeless people, but these people can't afford it, so you need to change your market. Who else needs tents? Campers or hikers. Do they see it as an investment? Yes. Can they afford it? Yes.”

Depending on the market sector your business trades within, a structured approach to price increases may be beneficial, where some products or services increase, and others remain the same. Look at your cost data, the price sensitivity of different goods or services and the buyers of your products or services.

Also, some businesses will incrementally raise their prices to cushion the blow experienced by their customers. In the B2B space, price rises tend to happen when contracts are renewed. Again, communicate this clearly and early to avoid issues with new supply contracts.

Many businesses use a subscription-based approach for their pricing — digital services are a good example. Here, smaller and incremental rises are an excellent approach to ensure subscribers are not hit with a substantial price increase in one go. This approach can protect long-term revenue and reduce customer churn.

Raising prices

We spoke with Demed L’Her, CTO at DigitalRoute.

What factors should be considered when determining the right timing for a price increase?

“As the cost-of-living crisis continues across the UK, organisations may fear increasing prices whilst people’s budgets are reduced; the same applies to businesses. Making a hasty increase can have a negative impact on customer retention. However, the negative impact can be minimised by adopting a strategic approach to price increases that considers customers’ preferences.

“To establish the right time for a price increase, businesses should understand better what customers really value by looking at their actual usage of the service. The use of a service can fluctuate throughout the year, but software is available to monitor the data continuously. This gives the company a better understanding of how the platform is being used and whether a customer is likely to be accommodating for a price increase. Customers with high usage can be segmented and targeted, most appreciating that they get good value from the service they receive.”

How should I segment my customer base to tailor the price increase strategy for different customer segments?

“Ultimately, every digital company creates usage data which can be collected, monitored, and monetised where appropriate. Tools exist to capture and segment usage data in real time to allow companies to understand better how the platform is being used and how it could be adapted accordingly.

“By having a greater understanding of actual customer usage, businesses can implement a usage-based pricing model that means customers only pay for what they really use and value on a platform. This creates a fairer — and for some users — a cheaper model that can be altered depending on their use of the platform. Customers decide whether the price should be increased by simply choosing to use and value the product more.”

What role do market research and customer feedback play in gauging the potential impact of a price increase?

“By seeking customer feedback and market research, companies can gauge the overall perception of price increases in the current economic environment. With financial pressures facing many consumers, surveying customers on their affordability circumstances can be helpful. Using this information, the business’s approach can be tailored to the client’s needs, reducing the risk of losing a customer.”

Can specific psychological techniques or strategies be employed to make price increases more palatable to customers?

“With usage-based billing systems, many businesses also introduce extra features at different price points; therefore, highlighting the additional benefits that will become accessible can persuade the customer.

“Additionally, incremental increases can lessen the pressure on customers. By implementing small, gradual price increases over time rather than sudden large jumps, customers might notice small changes less than significant ones.”

What strategies can retain loyal customers during and after a price increase?

“Continuous engagement with customers is critical during a price increase. Keep the loyal customers engaged with regular updates, exclusive content, and personalised interactions. This maintains a strong relationship beyond the transaction.

“An essential aspect of this is also encouraging customer feedback. Engage with the customers to understand their concerns and feedback regarding the increase. Any questions and concerns can then be proactively handled. Show customers that their input contributed to the enhancements they’re paying for.”

What is the best way to communicate the upcoming price increase to customers, and how to address any concerns they might have?

“Transparency, clear communication, and a focus on the value that customers receive are crucial in making any price increases more palatable. Different strategies may work better for different customer segments, so the communications approach must be tailored accordingly. Usage data can suggest the best time to discuss a change with customers. By understanding when most users are online, the customer care team can judge when it is best to get in touch and secure the renewals.”

Value and quality

Before embarking on any price rise, it is essential to research the potential impact this could have on brand loyalty and future contract negotiations. Again, communication is critical to ensure all parties understand the value proposition and the reasons for the price increase.

Price is a marketing weapon, but many businesses, no matter their industry or sector, understand that price isn’t everything. The massive upheavals seen during the pandemic and the changes with logistical support drove many businesses to re- evaluate their supply chains, with many moving supplies closer to their operations at increased cost.

Ultimately, if your business has reached the point where it must increase prices, developing a strategic plan to achieve these changes that considers your marketplace, brand, commercial partner and end customers will ensure the increase can be achieved without damaging market share.

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