It’s a question often asked and certainly something that every small business wants to know. When you’ve started your business, set your prices and gained loyal customers, how do you go about raising your prices without losing customers?
Here’s a few tips that are usually recommended:
- Let your customers know in advance.
- Be transparent and honest.
- Explain why your prices are increasing.
The general consensus is to be upfront and explain to your customers what you’re doing and why. While transparency is important, these tips are only applicable for certain types of products or services. The other problem with being too honest and drawing attention to the increase, is if your reasoning isn’t good enough, you may end up driving customers away to a competitor.
A more successful approach requires an entire strategy, based on your existing knowledge of your customers, their buying behaviour and their expectations.
How much are your customers willing to pay?
The first question to ask is how much your customers are willing to pay, as this informs everything.
Willingness to pay (WTP) can be worked out by analysing your customers’ previous behaviour through direct and indirect surveys. Asking your customers questions about how they feel about the cost of your products or services will give you an immediate answer.
For example, these questions can be sent in a follow up email after the customer has made an online purchase:
This provides some insight, in addition to quantitative data of your customers’ spending habits that will give a strong indication about how much they’re willing to spend. These analytics are likely to provide a truer representation of their WTP than the qualitative data alone.
Many factors affect the WTP, such as the different characteristics of your customers, from location, to age and affluence. Using a breakdown of this data however, provides a more detailed picture of the buyer persona, and how much you have to play about with and increase prices within that WTP bracket.
Socioeconomic factors affect the market
How much your customers are willing to pay for your products is not only determined by their own circumstances, but also other socioeconomic factors in order to time the increase right. It’s useful to be aware of the state of the economy and shifts in the market, as this will affect customers’ purchasing behaviour and their WTP.
When there is a recession for example, customers will have a lower WTP than when the economy is booming. Another example is around public holidays: your customers may be more willing to pay a higher price for last minute gifts or rush delivery. This is a common model festivals and other events use, where there’s a limited offer on the lowest price tickets, and as it gets closer to the date of the event, the prices increase.
Remember, it’s all about the customer experience
The ultimate thing to keep in mind when raising prices, is how it benefits the customer. Your customers will not be happy paying more for something unless they thought there was added value. Creating a customer-centric narrative in your marketing that highlights the increase in quality and value will ensure the customer that they are going to be getting more for their money.
Communicating that the brand has taken customer feedback on board and has invested in making upgrades accordingly to both the product and the customer service as a whole emphasises that the customer is the priority in the decision-making process.
A higher cost for an improved product or personalised services will subsequently seem logical to the customer. As identified in a PwC survey, 86% of customers would rather pay more for a better customer experience.
Approaching your strategy with your buyer persona in mind will also help actually delivering the needs of your loyal customers. For example, many organizations are beginning to switch their suppliers to more organic, ethical, environmentally friendly businesses.
Depending on your target audience, many customers will not only accept paying a higher price for a more sustainable product (with the knowledge that the resources are likely more costly than something synthetic), but they will also have a higher level of satisfaction as this aligns with their values.
It’s important to be authentic and honest however, as customers are more aware of greenwashing and false advertising in general. In fact, according to a 2020 IBM study, 71% of respondents said they were willing to pay a higher price to brands that offer traceability.
Top tips to remember
There’s a lot to consider to create a successful strategy where you can raise your prices without losing or annoying customers. Here are a few final tips to keep in mind and consider:
Check your prices against your competitors
We discussed working out the WTP bracket of your customers earlier, and this is also determined by the prices of your competitors. What the customer expects to pay will be based on prices of similar products or organizations, so it’s important to stay within a reasonable range in relation to competitors when increasing your prices.
How unique is your product?
If your customers are able to find the same thing for a cheaper price elsewhere, they will often go with the cheaper option. If you’re able to highlight how your product offers greater value to the customer than your competitors, you’ll be more likely to retain them.
It’s a tactic used often, of incrementally increasing the quality or quantity of the product disproportionately to the price. The classic example is the “psychology of popcorn” at the cinema, where three box sizes are on offer, but the perception value is distorted as the lowest price is already marked up, so the jump in price to the largest size seems small to the customer. It’s all about perception: by adding “premium” options of existing products, you can charge a higher price even if the quality is only marginally improved.
Cater specifically to your audience niches
You don’t always need to improve the quality of your product. Instead, you can modify certain features, changing the title and description so your audience can differentiate between the options. The different tiers would cater to the different personas of your target audience, such as; amateur > advanced > pro; or everyday use > fitness > business. Marketing each version to fit the ideal of your different audience niches will encourage them to purchase a product with a higher price tag if it’s something they identify with.
Timing is everything, and you can use it to your advantage. In addition to planning around public holidays, when releasing a new or improved product, you can market the item with a limited offer; a ‘discounted’ price for a certain time. You can then increase your prices after this limited time is up. Since you’ve communicated this with your customers all along, they will understand and are prepared for the price to increase.
Learn how to set up prices in Jumpseller