Production and business costs have been rising for some time, and a lot of strategies for managing costs are getting less effective in current reality. With the increase in market conditions, price inflation and weak economic indicators; we are now faced with little choices but to ratchet up our prices. However, this is not an easy task as the consideration of raising prices in the middle of a sluggish economy and the risk of losing customers and becoming vulnerable to competitors of substitute products begin to set in, you will find it difficult to break the news of increased prices to your recently acquired customer base.
Maintaining and Increasing customer base and sales while passing along cost is a tough balancing act, but it can be done. Let us explore the following:
Know Your Numbers
Frist of all, you will have to know your numbers, understand your profit & loss account, and calculate your gross profit margin, net profit margin and OPEX margins. It is also imperative that you understand what products make money and which do not. This will prevent you from increasing prices in the wrong area of your business and losing key customers.
Now, with this knowledge, you can understand the impact of price increases on your business. Let us look at this scenario, if your business is making a gross profit margin of 30% and is to increase by 10%, then you would have to lose 25% of your customers to be financially worse off, this means that if 20% of your customers objected to the price increase of N100 in every N1000, then you would still be better off putting your prices up. The scenario gets better if you were to raise your prices by 30%, you can afford to lose 50% of your customers. Obviously, if you have higher or lower margins, the figures will be slightly different, but the concept will be the same.
In the case of multiple products and services which are more commodity-based, you need to look for those products that are going to meet one or more of the following criteria:
- High sales volume – so that a small increase per unit can have a big effect (e.g. N10 on a litre of petrol)
- High ticket price item – so that a reasonable N increase is a low % increase on the price (e.g. N500,000 on a 2016 G-Wagon AMG Turbo)
- Highly differentiated product – where you can show a real point of difference that will justify a higher price (e.g. iPhone)
- Low access to knowledge – where access to competitors’ price and offering is harder to find or is confusing (e.g. energy tariffs)
- Ability to reposition – turn your product/service into a basic/better/best, so the basic competes on price and the others on value (e.g. shoprite’s value and finest range)
- Add-ons – have a basic range and charge for extras (e.g. a Sponge cake vs. a Red velvet cake).
Boost the Perceived Value of your Product/service
The reason why some Lagosians were less concerned about the hike in price of PMS in May was because of its perceived value due to recent scarcity. Back then, Fuel could suffice as a birthday gift or a show of affection. Also, have you thought about why people pay as much as N10,000 for specific slimming tea/coffee brands but are not ready to pay N2,000 for others? It’s all about a perceived value.
Customers judge the value of things they buy. Because of perceived value oftentimes they offer more or less than the actual value of the product, this is because of the human factor of a consumer/buyer. Hence, if we conclude that a customer’s perceived value being greater than the price tag leads a consumer to buy a product, then we have two options; lower the price, such that it will fall below their perceived value, or increase the perceived value such that it crosses the price threshold. Logically, raising the perceived value is better than lowering the price and settling for narrower profit margins.
It is important to consider the following approaches when trying to boost the perceived value of your products;
- Relative pricing – The thing is people don’t derive direct value from money; they derive it from the things money buy. Therefore, if you want to closely convey the value of something, you put it in terms of other goods that people recognize. The beauty is it works both ways. Ponder on a relatively costly item such as a good quality Shirt or a monthly gym membership for N10,000; imagine if you say “well, it’s just the price of three large pizzas”, all of a sudden it sounds a lot more reasonable. I can just scale back on those three pizzas and then I can afford this shirt or a month’s gym membership. It’s all relative, and we see that pricing is no different; we just need something to make it relative to.
- Convey Urgency or Scarcity – this is where phrases like “Limited time only”, “Special Offer”, “Only 5 items left” among others come to play. You can consider being creative with variations from the usual.
- Showcase Proof – Things like Money Back Guarantees, Testimonials, Video Proof, Free Trials, among others come to bear here.
- Give Bonuses Before Discounts. Buy one and get the 2nd free is the same as 50% off the first two orders. However, the first gives you a perceived value and is preferred by customers. This is known as price innumeracy and stems from the average consumer’s inability to make basic mathematical comparisons.
From a branding perspective, additional features, add-ons, or all around bonuses may do a better job at increasing your product’s perceived value than slashing prices.
Add More Value
“It’s about caring enough to create value for customers. If you get that part right, selling is easy.”
It is important to add more value to sweeten the deal. Your product should always be improving, but it’s simply counterintuitive for somebody to pay more for the same thing they got for less before. Justify the price increase by adding features or providing some other type of added value.
The easiest way for your customer to accept a price increase is when they get additional value from the deal. By adding a new feature, offering exclusive information, or giving them priority when it comes to questions, complaints, and suggestions they send, you can make the deal sweeter and desirable in your customer’s eyes.
Also, keep in mind that when you raise your prices you will be presenting to two groups: new and existing clients. The new customers don’t know you raised your prices. Show them your value proposition and justify your price. It is your current clients that you will be concerned with. Your presentation should not be about the new pricing but about your offering.
The man who will use his skill and constructive imagination to see how much he can give for a dollar, instead of how little he can give for a dollar, is bound to succeed. – Henry Ford
Another strategy is to transform quantity; offer a big quantity product at lesser price point. Rational customers will obviously look out for products with high quantity. For example, I usually purchase a 4 pack toilet roll set at a particular price. Now, since the overall price has increased, I have been compelled to buy a 6 pack toilet roll set at a good price. Hence, for the toilet paper companies, cost is reduced but profit is maintained or increased.
This sort of bundling allows you to increase your profit margin. Think about how you could sell a “deluxe” version of your service, or how you could “supersize” it.
A premium product is that one which involves price repositioning. Here, customers are recommended to buy an alternative product which costs more but is so attractive that the customers are not lost. For a premium high priced product, a free offer also helps keeping customers bonded with the brand. Hence, the premium product helped you increase your price but the freemium addition kept the attraction quotient intact.
IrokoTV or Spotify are good examples of how to offer a freemium. They allow you to use their platform to watch some movies or listen to tracks for free, but the free version comes with some limitations, and most times you end up subscribing to the premium version.
Utilize the power of context
Is there ever a time that a bottle of coke is worth more than another? Logic would dictate that this answer be “no,” but consumers know that just isn’t the case. Where you buy is just as important as what you buy; customers were willing to pay higher prices for a bottle of coke if they knew it was coming from an upscale hotel versus a run-down grocery store; it was context that had the effect here, it struck subjects as unfair to pay the same.
You need to provide potential customers with subtle cues that justify your higher prices, because perception goes a long way towards influencing their evaluation of your prices.
Offer Multi-Product Packages
If you sell related products, you can put together product bundles that will offer added value to your customers. For example, if you sell computers you could create a bundle that contains a computer, a mouse, and a keyboard. If you sell clothing then you could sell complete outfits together.
Strengthen the relationship
End on a positive note. Thank the customer for understanding and for his/her continued business. Express your enthusiasm for their continued patronage.
It’s All a Mind Game.
The key benefits of all of these strategies is that the customer will feel like they got a great deal and your sales will increase at the same time. The best part is that all of these tactics are super easy to implement and will improve your sales immediately. We really do get what we pay for, so sell value and the overall exceptional experience associated with what you have to offer. People will always pay more for something they love that solves a problem.
It’s tough (or impossible) to predict how your customers will react to a price change, but if you follow these methods then you certainly have the best chances of not only avoiding a negative reaction, but actually boosting your profits!
It’s easier to explain price once than to apologise for quality forever.
Photo Credit: Foto.com.ng