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Is The Price Right?

With the right execution, a price increase doesn't have to cost you your customers.
October 15, 2008
URL: http://www.entrepreneur.com/article/198068

As you watch your expenses steadily climb to new highs, it becomes harder to deny the inevitable: You need to raise your own prices. But your anxiety has kept you from pulling the trigger on the pricing gun. Will your best customers balk at the change and walk across the street to your competitor?

Sarah Lurie, founder of Iron Core, a kettlebell fitness center in San Diego, faced that uncomfortable question in January as she watched her own costs rise. But she decided to look at it as an opportunity to hold her core customers. "I knew we would lose some people," says the 37-year-old former Wall Street trader. "But my logic was that it's better to have a smaller group of people who are willing to pay more and stay with you longer." Having checked the competition's prices, Lurie felt confident that a 30 percent increase was reasonable. Indeed, most customers were willing to pay the new $129-per-month membership fee, and only a handful chose not to renew.

Reviewing competitors' prices is a good place to start when calculating an increase, says Elizabeth Gordon, president of Flourishing Business, an advisory firm for entrepreneurs. Then look at your own costs and do a customer profitability analysis: Try to figure out what customers' threshold will be for a price increase and which clients might walk.

"You have to be able to say, 'If I raise [prices] this much, how much of a chance is there that I'm going to lose this customer?' Because that 5 percent increase may only net out to a 3 percent increase," says Kevin Ryan, a partner with accounting and consulting firm Citrin Cooperman. You may find that those customers most likely to grumble about a price hike are also your least profitable, and you won't be sad to see them go.

To help get customers on board, give them as much notice as you can. In fact, if you're even thinking about raising prices six months from now, send out a letter saying that your expenses have gone up and you haven't increased prices yet but that you may have to do that at some point. "You've opened the door for that future price increase and it becomes easier then," says Ryan. Transparency will go a long way with your best customers, who will be more sympathetic if you remind them you're hurting, too, says Gordon.

Also consider your business's pricing structure. Instead of doing a larger price increase for a package of several products, unbundle the products and increase each slightly, suggests Jagmohan Raju, professor of marketing at the University of Pennsylvania's Wharton School. "Then you are not crossing a psychological threshold that might be more conspicuous."

Another option is to offer a new tiered pricing model: good, better, best. If the customer decides he doesn't need the bells and whistles, he can take the midpriced product, explains Andrew Gregson, author of Pricing Strategies for Small Business. "The middle is probably where you want to be anyway, where you get the most margin and the customer is getting the best bang for the buck." To ease sticker shock at her gym, Lurie introduced a new option, the class card, which allows clients to purchase a series of classes, rather than pay the monthly fee. The cost actually winds up being more per class, but those too commitment shy to sign long term feel they're getting a break.

While it's natural to be nervous when asking for more from customers, keep in mind that the most loyal customers want more than the lowest price from you. "Part of the definition of a loyal customer is someone with little price sensitivity," notes Gordon. "If you're providing such great value to your customers that they can't live without you, a little price increase isn't going to scare them away. And the people that are scared away would probably get scared away by something else in the future."

C.J. Prince is a writer specializing in business and finance. Reach her at cj@cjprincemedia.com.