Pros/Cons and Risks/Benefits of Raising Your Prices

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What are the pros and cons of raising your prices?  What are the risks and benefits of raising your prices?  Interestingly enough, at least to me, I did a search today for some background information on this. Result number one?  “The pros and cons of rising-rate CDs”.  I can live with that, even if it is irrelevant to me.  Result number two? “The Pros and Cons – Raising Meat Rabbits”.  I’m not quite sure where that one appeared from, but it made for an interesting read (except for the pictures).

I was a bit surprised at this.  Nowhere in the top 10 – the first page of results – was any information on what to consider when looking to raise your prices.

donuts

The results of raising your prices often directly correlates to how you market the increase.  I read a great article about sitting on the beach and wanting a Budweiser.  Your friend says he is going to run out and get one and is going to go to a run-down grocery store to get it.  How much money do you give him?  Now he says that he is running out to an fancy hotel to get it.  How much money do you give him then?  Human nature says that, even though you are buying the same product, you expect to pay more from a premium brand.  Most people would give their friend more cash – even though it’s for the same product.

Well, I came up with my own list of thoughts with regards to this.  Here are some things to think about.

  • Raising your prices can move you to a more upmarket clientele.  Companies and individuals that can afford the higher prices are more likely to have continued funding available (although it may be more of a process to extract it) and are more likely to buy additional services.
  • Price increases may position your product or solution as a “premium product”.  Increasing prices and higher prices do not necessarily lead to fewer buyers.  Look at Starbucks (or at least the way they used to be).  Risk factor: If your products are already considered premium, raising the price even higher could have a detrimental effect.
  • Increased profitability.  This is a simple thing.  Provide the same service.  Charge more.  Cost of goods sold remains constant.  Revenue increases.  Gross margin increases.
  • Consider adding additional “features” to your product or service – or highlight a feature that has existed in the past but has never really been promoted.  If you increase the value proposition, while only minimally increasing your cost of delivery, your customers will feel better about the price increase while you’re increasing your profitability.
  • Make sure you do an analysis of whether your market will support an increase in price.  There would be serious cash flow implications if they don’t.  One strategy might be to offer a new tier of product at the higher price, with some additional value added.  If you find that your customers are accepting the new solution, eventually phase out the old solution at the old price.  Offer to grandfather in current customers at the old price if they make a commitment in volume or contract length to you.
  • Make sure to understand the budgets of current customers and inbound leads.  If your customers are struggling to pay the current price, obviously raising your prices would not be immediately positive (although the strategy may pay off in the long run).
  • Understand what the effect on customers would be if you had to return to your original pricing level.  You raise your prices, few people buy what you’re offering, so you have to roll back your pricing.  What would the people who paid the higher price say?  What would the people who made a commitment in order to be grandfathered say?  What would the market in general say?  Would this make your organization look as if it failed?
  • How is your infrastructure currently set up (people, processes, technology, etc.)?  Could you support a rush of people wanting to be grandfathered at the old prices?  Are you willing to cut staff if you lose customers (but gain revenue and profit) at the higher price?
  • If you offer multiple products or services, will raising your price on one solution make your customers reduce their spending with you in another area?  Obviously, this would result in a minimal advantage to you, and possibly be detrimental to the health of other product offerings.
  • Are you giving your customers enough warning about the price change?  Do you have time to run a transition campaign to capture opportunity at the old price (if you want) and give people the opportunity to voice their concerns (if there are any) about the higher price?
  • Have you looked at improving customer retention and diversifying customer spending across multiple products and services before you looked at increasing your prices?  These tend to both be healthier and more sustainable activities than price changes.
  • Have you measured baseline KPIs (Key Performance Indicators) so you can track the effect of the price change on your business?  Things like close rates, aggregate revenue (selling more at a lower price vs. selling less at a higher price – is your profitability improving?), time to close, etc.
  • Have you empowered your sales and customer service staff to selectively include people in the grandfathering program in order to maintain customer satisfaction?
These are just a few of the things I came up with to think about.  I’m sure there are many others – please feel free to comment to add your two cents.
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Chris is Managing Partner of Fair Winds Strategies. Prior to this he was the Chief Innovation Officer at Internet Marketing Ninjas where he managed M&A activity, legal work, and also focused on the use of technology and other solutions to lead innovation and growth. Before IMN, Chris led the sale of his $10mil information technology company, twice an Inc500 fastest growing company in the US, to an investment banking firm in NYC. He has a strong passion for sailing, and had the opportunity to spend two years travelling from Lake Champlain to the southern Bahamas and back with his family.

1 Comment

  1. Chris loved this article. These are all excellent considerations for companies that are trying to zero in on the “right” price point. As a co-founder of Globalspec.com, pricing our product(s) and services was one of the most challenging aspects in the business in the early years.

    Andi

    Reply

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