How to raise your prices and keep your customers

ALL businesses need to raise their prices from time to time. There are many reasons - higher costs, improved performance, a need to fund expensive research or a repositioning of the product/service. However, it is important to realise that these reasons are all company-centric. Selling, and keeping customers loyal, is about being customer-centric. Customers do not like price increases, so how you implement them is important to your future prosperity. Badly handled price increases can ruin a perfectly sound business.

For example, in 2015 pharmaceutical company Valeant Pharmaceuticals International acquired two life-saving heart drugs, Isuprel and Nitropress, from its competitor. As soon as it had done so, it raised the prices of the two drugs by over 500 per cent and 200 per cent respectively.

This price increase was not due to improvements done on the products or an increase in manufacturing cost. The only change was the drugs' ownership. This is a prime example of what not to do when it comes to raising prices. This move was heavily criticised by both customers and politicians, and Valeant's stock fell by roughly 90 per cent. The now-departed CEO admitted that the price rise was a mistake.

So what is a better way for a business to raise its prices? Here are some strategies.

Explain the price increase

People are generally reasonable, so a sensible explanation of a price increase is usually tolerated by your customers. This is especially so if the price increase is due to the reasons mentioned earlier, such as rising costs, ongoing R&D or new features. In most cases, honesty is the best policy. On the flip side, this means that if your business cannot give a good explanation for the price increase, then do expect customers to resist. For example, Tesco continued raising its prices, despite there being deflation. The result was that this large food retailer suffered negative publicity as well as the ire of its customers.

Demonstrate value

The saying "You get what you pay for" rings true here. The price of a product/service is determined by several factors, among which are customer satisfaction and competition. If your business is able to consistently keep your customers happy and demonstrate advantages over the competition, most customers will not object strongly to a price increase. One way to soften the blow of a price increase is to add new features to improve the product/service further. Adding more value to the product helps to justify the price increase.

Keep the price increase small

Customers adjust fairly quickly to new prices, often after an initial grumble. The less the increase, the less there is to grumble about. If your business needs to raise the price by a larger amount, it is advisable to break this into smaller amounts and stagger the price increases. Banks often employ this tactic. They know that if they increase the charge of a service by $40, customers may take their business elsewhere. However, increasing it by $10 in four different stages stretched out over several months or even a year reduces customer complaints.

Inform customers early

No one likes a surprise, especially a nasty surprise like a price hike, so do alert the customer well in advance before the business raises its prices. Depending on your business, this could be done via the company website, newsletter, e-mail, or on a one-to-one phone call or meeting for VIP customers. Providing advance notice of a price rise has the added advantage of boosting sales. Customers may be procrastinating about making a purchase, and once they are aware of an impending price increase, it helps convince them to buy sooner.

Businesses need to remain solvent and raising prices is sometimes inevitable. In such cases, this move can help your business assess customer satisfaction, based on how well the business retains customers following a price increase. And while you may lose the odd customer here or there, other loyal customers may even express surprise that the business did not raise its prices earlier. What matters is that you know quickly if your business has over-priced itself while under-performing.