How to raise prices and not piss your clients off
Value-based pricing and cost transparency
On the 1st of January, I got my first notification of a price hike from a supplier. It seems unlikely they were actively working in their office on the bank holiday. Instead, the notice came attached to an automated email accompanying this month’s invoice. Well, Happy New Year to you, too.
But it got me thinking. Let’s pull together the best practice, such as there might be, on price rises and how best to do them in a way designed to piss off your clients as little as possible.
Fast-growing startups and rapidly expanding small and medium-sized businesses (SMBs) commonly underprice their products or services. This tendency persisted even before the recent inflation surge. Although some companies adjusted their pricing last year, such reactive measures are not a substitute for a well-thought-out pricing strategy.
You are going to raise your prices this month. Aren’t you? In fact, if you take the advice of Herman Simon, founder and honorary chairman of Simon-Kucher & Partners, who have been interviewed on The Melting Pot, you will raise your prices by regular small amounts throughout 2024.
At NewSignature, a strategy of incrementally increasing their professional services fees by 1%-1.5% per month over 24 months was implemented discreetly. No announcement needed. Focusing on their newly quoted work, this approach enabled a gradual pricing escalation. These subtle, consistent adjustments successfully positioned their professional service fees at the market’s upper end, aligning with their well-established reputation for quality.
If the necessity to hike IT support prices by 50% at ITLab hadn’t been a matter of survival, I might be experiencing the same mix of rational understanding yet emotional reluctance that I often observe in many of our clients.
During a recent valuation session with a client, we assessed how their pricing strategies affected their business. Our analysis revealed that a 1% price increase across all customers would instantly boost their valuation by £1 million. Given the current high-inflation economy, which seems set to continue, it’s clear that failing to implement an average annual price increase of at least 10% essentially means losing ground in real terms.
The impact of consistently increasing prices for existing customers year-on-year is enormous. A business growing at a CAGR of 100% from £1 to £100m over an eight-year period will add £120m in additional ARR, £200m in cumulative free cash flow, and £1.2bn in enterprise value at a 10x revenue multiple assumption by increasing prices by 10% per year on average.
Example from Notion Capital
I’ve come to terms with my mobile provider’s practice of “adjusting” prices mid-contract. This approach isn’t unique to them; numerous companies across various industries commonly implement price increases without prior notification to customers.
Hidden Price Rises
Are there elements of your products or services that you could increase prices without telling anyone or requiring consent?
There are some scenarios where we have seen clients achieve this with success:
Variable Pricing Elements: If your product or service includes elements with variable pricing (like shipping costs or material surcharges), these could be adjusted without explicit notification.
Tiered or Usage-based Services: For businesses with tiered pricing or usage-based services, higher tiers or additional usage rates could be increased, particularly if these are not part of a fixed contract.
Ancillary Services or Add-ons: Prices for additional services, add-ons, or optional features not part of the core offering could be increased with minimal notification, assuming they are not under a fixed-price contract.
This isn’t an exhaustive list; I wanted to get you thinking.
Products and services on subscription and contracts
You did this already, didn’t you?
Assess and Revise Contract Terms
Reviewing existing customer contracts is essential to identify any limits on price increases. Commonly, these restrictions relate to the contract’s term, but there might also be caps on price hikes or links to specific indices agreed upon earlier. This review is particularly important if you’ve merged with or acquired other companies, inheriting customers under varied contract terms. The objective is to confirm that your contracts allow flexibility to adjust prices per your strategy in an inflationary environment. Ideally, your contracts should have clear clauses that empower your company to alter prices as needed.
Implementing systems that automate future price increases is crucial, ensuring they’re based on structured programs rather than effort-based or require emotional decisions.
Automate Renewals: Prices can be increased at renewal in some subscription and contract models, especially with an auto-renewal clause.
Long-term Contracts with Escalation Clauses: If contracts have built-in price escalation clauses, these can be executed as per the agreement without further notification.
Index-linked Price Adjustments: If your pricing is linked to an index or external benchmark (like inflation rates), and this is stipulated in your contracts or terms of service, adjustments can be made in line with these benchmarks.
Surprisingly, customers of fast-growing firms often accept the scale of price increases more readily than expected. The primary issue is the timing, as customers dislike unexpected hikes that haven’t been budgeted. By consistently implementing annual price increases predictably, you can condition your customers to anticipate and prepare for these changes. In some cases, they may even reach out in advance to inquire about upcoming price adjustments for their budgeting purposes.
It’s just plain old putting the price up
Communicating unexpected price increases for subscription or contract-based products demands careful planning to avoid adverse reactions. Mishandling this sensitive information can lead to customer dissatisfaction, backlash on social platforms, or even the need to retract the price hike. It’s vital to convey these changes thoughtfully to mitigate negative impacts and maintain customer loyalty.
To avoid problems and soften customer backlash, companies must implement these three crucial steps when announcing a price hike. These approaches are rooted in academic research and validated by my own experience.
- Refer to the action straightforwardly as a ‘price increase,’ avoiding euphemisms like ‘price adjustment’ or ‘price change’
References to ‘updating price’ or ‘adjusting price’ are common practices, as companies often hesitate to state they are raising prices directly. However, using such euphemisms can damage relationships with loyal customers. Extensive research in consumer psychology consistently shows that obscuring bad news seldom benefits firms.
Customers value authenticity and honesty, particularly when receiving bad news. Using euphemisms to communicate a price increase can backfire, as it doesn’t lessen the impact or distract customers. Rather, it raises suspicion and scrutiny towards the message, undermining trust in the company. Being straightforward in announcements is crucial to maintaining customer trust and credibility. Clear and direct communication is key; call a spade a spade.
Explain the reasons for the price increase clearly
Communicating a price increase often makes confident leaders hesitant and apprehensive, viewing it as an unwelcome duty best handled quickly and with as little fuss and detail as possible.
Research indicates that customers’ reactions to price increases are significantly influenced by their perception of the fairness behind the reasons for the increase. In today’s context of inflation, widespread shortages, escalating input costs, and post-pandemic normalisation, customers are generally primed to expect price hikes. Therefore, providing a concise, straightforward explanation for the price increase can be exactly what the customer expects and needs. This effort in clear communication will play a crucial role in maintaining a positive relationship with the customer base.
In Dr Robert Caldini’s 7 Principles of Persuasion, he talks about the magic of the word “because”. So ensure you clearly say we are putting our prices up because…
Which of these will you build your clear, concise communication upon?
Inflation Reality: “The value of money has decreased, affecting everyone. We’re navigating this together.”
Cost Pressures: “Rising wages and costs have reached a point where we can no longer absorb them fully and need to increase our pricing.”
Pricing Fairness: “Our goal is to establish pricing that truly reflects the value we provide.”
Business Evolution: “As we grow, it’s essential to revise legacy pricing to ensure fairness and consistency across all customers.”
- Link the price adjustment to tangible benefits for the customer
Effective price increase communications are most successful when they focus on the customer. They should offer a compelling value narrative, a story that clearly explains the reasons for the price hike while emphasising the benefits and value it brings to the customer.
A value narrative can be compelling even when rising input costs are mainly driving the price hike. By informing customers that maintaining current benefits necessitates a price increase and emphasising the choice to uphold product quality over cutting costs, you strengthen the company’s commitment to value. This approach reminds customers of the original reasons they chose your firm and reinforces the value and quality they’ve come to expect from your products or services.
Here are a few examples:
Product Upgrades: “We’ve significantly enhanced our product. Here’s a glimpse of the exciting developments on our roadmap that you’ll benefit from.”
Service Improvements: “Our investment in customer support and services is part of our commitment to serving you better.”
Sustaining Innovation: “Maintaining healthy margins is crucial for our sustainability and ongoing investment in improving our services for you.”
- Offer Advance Notice and Gradual Implementation
I wrote the paragraph below, but in hindsight, this should be part of your team’s negotiation toolkit rather than a blanket policy.
To ensure customers have ample time to plan, a good practice is to give a three-month notice for smaller customers and extend this to six months or more for larger enterprise clients. This approach helps maintain transparency and trust while smoothly transitioning to the new pricing structure.
So you decide. If it were me, I would tell the customers the prices were going up as soon as the contract allows and then manage from there.
One of the most intriguing insights from the field of behavioural economics is the Pratfall effect. In both personal and product contexts, the act of acknowledging weaknesses actually enhances credibility. When we openly recognise flaws, it makes individuals, companies, and offerings more believable and appealing. By embracing vulnerability and admitting shortcomings, you tangibly demonstrate honesty, which, in turn, bolsters the credibility of all your other claims.
You might announce the rise in the price and then declare that you messed up and say the raise isn’t as much, seen that, or that the raise will only take effect in 3 months. Had this happen to me last year. I actually felt sorry for them.
Ensure your team understand the baseline for price increases and the conditions where they walk away. Allow them to review and adjust prices for strategic accounts as necessary. Prepare a list of potential concessions for key customer negotiations. These could include offering benefits like expanded product access to meet your price targets or accepting customer concessions, like longer multi-year contracts, in exchange for a smaller price hike.
Brief the team internally and give them the tools and motivation they need
When communicating a price increase, it’s crucial to:
Clarify the Reasons: Justify the need for the price hike, tying it back to the narrative you’ve established about your company’s value and growth.
Highlight Benefits: Explain how this change benefits them, such as meeting quotas or earning incentives like bonuses.
Show Executive Support: Demonstrate that this decision has the backing and commitment of the company’s leadership.
Provide Resources: Supply your team with FAQs and materials to handle objections effectively.
Align Incentives: Ensure incentives align with the new pricing or introduce bonuses to reward the team for this additional work.
Detail New Rates: Clearly communicate the exact new rates and the thresholds for when to walk away from a negotiation.
Encourage Feedback: Allow the team to review and selectively adjust rates, fostering a sense of involvement and ownership.
Summary
Implementing a strategy for continuous price increases requires a blend of preparation, insight, and courage. To successfully navigate this process, follow these three steps for a solid approach to raising prices. Your plan should include supportive activities that build your team’s confidence and maximise your likelihood of success. You’ll likely find that customer resistance is minimal, leaving you to wonder why you didn’t do this earlier.
Written by business growth coach Dominic Monkhouse. Find out more about his work here. Read his new book, ‘Mind Your F**king Business’ here.
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