Marketers that avoid price increases face exiting unprofitable products, adopting different pricing techniques such as bundling, or closing their doors.

When does a marketer need to increase prices? The short answer is when the time has come to increase the company profits.

And the best time for most companies to increase prices is when everyone else is doing it. This way you can join the crowd and not stand out. This strategy is commonly deployed by major banks shifting interest rates on loan products. One moves, the rest follow.

The best way for many marketers is to regularly review prices and increase prices in smaller incremental amounts so they avoid bill shock. Bill shock occurs when a customer receives a bill that is substantially higher than they anticipate. When bill shock occurs, customers may be motivated to shop around and compare your prices with a competitive offer.

Incremental price increases slip under the customer’s radar, or, at least, are more acceptable since most customers expect prices to increase in line with costs.

If a marketer’s costs increase, marketers should look to increase prices. Companies that do not increase charges in line with costs are accepting a reduction in profitability.

Finally, if a marketer is undercharging, signs emerge and remedial action should be taken and this involves increasing the price.

Signs of Under-Pricing.

There are three signs that point to underpricing.

• The first is when sales volume is overwhelming and outstrips the ability of the company to properly service it. So if the business your company attracts versus your competitors is unusually high for your industry, raise your price.
• Secondly, if the company is attracting too many price buyers, especially known industry price buyers.
• Lastly, there is a simple litmus test marketers can apply to test pricing levels. It isn’t particularly scientific. But when customers are not complaining about the price, it’s too low. When customers complain a lot, it’s too high. Marketers can tweak the pricing until the whining sounds about right.

Myth-busting the Price Hike Fears.

The biggest fear marketers have regarding price increases is that their customers will be scared off. It’s true some customers may leave, but normally in fewer numbers than marketers expect and the ones left behind are more profitable to offset it.

Calculating price elasticity of demand (which is the measure of responsiveness in the quantity demanded for a product) may allay these fears. A simple formula is PEoD = (% Change in Quantity Demanded)/(% Change in Price). You can follow this link to a tutorial about calculating PEoD using this formula.

For some companies, it is more profitable to increase prices despite reduced volume sold. The less volume sold, the lower direct costs and this, coupled with a higher price, may offer a greater gross margin.

In other cases, increasing the price has the opposite effect. Since customers believe that they get what they pay for, increasing pricing may increase sales because the customer believes the offer to be better or higher quality than alternatives.

Most customers have a tolerance within a broad price range. A marketer should understand this price range and factor it into pricing strategy. An exception may apply to true commodity items although even this is under challenge as marketers try to differentiate even the most basic items such as milk or bread.

How to Increase Prices.

Marketers need to prepare for price increases. They can increase their prices overtly or increase prices in such a way as a customer isn’t aware of the rise.

Increasing pricing overtly essentially means the marketer has set new pricing that is valid from an effective date. It may be by individual or selected product, or it may by product lines or universally applied across the entire range.

A marketer does not need to inform customers of price increases where the customer doesn’t care, the market is inelastic, the customer is transitory with no long term relationships or is unlikely to know the previous price. A customer is not going to care if its brain surgeon increases its fee.

Where the opposite situation applies, customers should to be notified in advance to avoid nasty surprises or bill shock.

Marketers should also equip sales teams with responses to price objections and remember to update price lists and signage.

Increasing pricing without attracting attention can be achieved by changing the way the product is presented. Techniques such as quantity discounts (for example, 25% more for free) shifts the customer’s attention to value rather than price.

Other techniques include the removal of promotional discounts and special offers, thus forcing the product to be retailed at its full price, or changing the terms and conditions of trade (such as reducing the credit terms to improve cashflow).

Apart from improving profitability, increasing prices has the added benefit of weeding out the price-buyer who is often not worth the effort to keep. If a marketer’s products or services are unique and hard to find, and they have a good reputation for supplying them, they shouldn’t be rattled about increasing prices.

RELATED POST: Pricing Strategy – When to Drop Prices.

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