Raising Prices
When and how can I raise prices?
First, let’s start with an assumption that your product is great value and your existing pricing strategy is leaving too much money on the table. (See other blogs on licensing strategies and setting prices). Let’s also assume we are talking about a business that has repeat purchasing– like a subscription.
For new customers, you can normally just raise your prices without any unsuspected consequences. Pro tip: Signaling an upcoming price increase can trigger a sense in urgency in many who cannot otherwise decide quickly. Legacy customers, however are a more complex question:
- Legacy customers are your most stable revenue and a source of referrals. Not raising that price is a way to say thank-you.
- Fear of loosing a great “grandfathered in” pricing is also great motivation for legacy customers to stay with you in an uninterrupted way.
- When a supplier has stable or decreasing prices, there are few reasons for a buyer to consider alternatives or to think about about value. Even if the price change is minor and still an exceptional value, the customer often will start thinking about you as a short / mid term (aka temporary) solution.
Note: When your business is growing, you can keep legacy customers on legacy pricing far longer because of these reference / referral benefits and the fact that it is an increasingly smaller part of the business that has this lower pricing. As the business growth slows; however, then the pressure to raise prices of existing customers increases.
Suppliers will sometimes “test” rate increases on existing customers and walk away feeling that their customer “understands”. The reality is usually far less positive. Imagine a customer that finds the new prices abusive, how would they behave? They might push back a bit, but ultimately they will pretend to accept so they can buy enough time to find an alternative supplier. In reality, you can’t easily test your customer’s resistance to price increases without taking substantial risks.
Side bar:.Amazon has a very complex system of pricing and fees to a vendor. This already makes it easier to hide price increases (this is relatively normal technique but it does have the effect of reducing customer satisfaction.)
Their second strategy is pure genius: Advertising. Amazon is quickly becoming one of the largest advertisers in America. By selling ads and placement (Google style) to sellers (eg USB charger vender) , sellers in this category bid up the price of keywords and positioning until the cost of advertising is nearly the same as the entire product transaction margin. Different products have different margins yet Amazon does not need to justify different fee rates (eg. credit cards charging groceries different than jewelry). Instead, the sellers hand over all the attractive margin as they focus on volume and Cost of Customer Acquisition. (We have long seen these effects in Adword sales– example keywords for “flights LA to NY” have adword costs equal to 75% or more of the earnings of a travel site selling that ticket) For any two sided marketplace, it seems that Google & Amazon have really changed the rules and found a way to raise prices without loosing too many legacy customers.