How to raise prices and still keep customers happy
After getting the product right, the next concern for any entrepreneur is cash flow. The moment you think you've got the perfect price point, your product cost inches up.
November 26, 2012 / 17:05 IST
Khyati Dharamsi
After getting the product right, the next concern for any entrepreneur is cash flow. The moment you think you’ve got the perfect price point, your product cost inches up. But can you always pass on a price rise to customers?Raising prices after the initial run is a challenge because you never know how consumers will react. Yet, costs are always shooting up – general inflation, bigger electricity bills, costlier labour and transportation, raw materials shoot up and costlier premises, not to mention staff salaries. Some entrepreneurs were forced to raise prices post the recent introduction of service tax. If you’re compelled to raise the price of your product or service, here’s what you can do to soften the blow.Inform Customers In AdvanceGive customers time to deal with the ‘shock’. “We told customers three weeks in advance that we were going to raise our prices. To those who questioned the increase, we explained that inflation and the basic cost of a driver moving from point A to B had gone up fourfold,” says Ankur Vaid, co-founder of Party Hard Drivers, which offers drivers on hire on an hourly basis.But when you announce a price rise, expect an immediate spurt in demand. Explains Amol Naikawadi, Managing Director of Indus Health Plus. “When customers are planning to take health tests a week or two later, they advance their deadline if they know prices are going to rise well beforehand. It’s a feel-good factor for them.”Take Your Team Into ConfidenceIndus Health Plus increased the prices of their preventive healthcare tests from Rs 9,00-11,000 to Rs 14,000 and a high-end package of Rs 17,000. “When we raised prices, our manager complained more than customers did! So, take your our entire team into confidence and involve them in price-change decisions. When we convinced our front desk about why we needed to increase prices, half the battle was won,” adds Naikawadi. Also, customers don’t always resist a price rise and will stay loyal if they still perceive value for money,” he says.Sometimes, you have to raise prices when you tweak your produce or service to improve quality. Remember to train your team and tell them how quality has improved so that they can communicate it to wary customers. “We explained the enhanced product value to our team and the price rise was well taken,” says Visham Sikand, Co-Founder and Director of Indian Health Organisation (IHO), which offers discounts on medical tests, bills and doctor consultations in return for a subscription.Keep The Price Rise LogicalCustomers invariably and instinctively evaluate any price rise and you must be prepared with a logical explanation. The customer must clearly understand why he is expected to pay more. Also, raising prices when customers have a direct comparative could sometimes be the wrong decision, cautions Anuj Rakayan, Managing Director of Ananya Jewels, a diamond jewellery venture. “In the jewellery trade, one always sticks to the cost-pricing methodology as customers are aware of the comparative price of gold and general labour charges. Margins are fixed to allow us to manage the volatility in raw material price.”Promote Value, Not PriceIHO used an ingenious strategy when re-pricing. “We didn’t remove old price points; we just stopped aggressively promoting old value and price points,” reveals Sikand. “This worked because the product was new and people started to understand the product by its new value and price. Customers did not have a chance to complain since we added more value,” reveals Sikand.
Offer A Trial PackThis is a great way to test a new price point. The greater the number of takers, the easier it is for you to fix on a new price. How you communicate this can also be important. For instance, MyPhoneExplorer, an app, throws up a pop-up window every time someone uses it. It says, “Although MyPhoneExplorer is freeware, the development of this software requires a lot of time. With your donation, you can ensure future development of MyPhoneExplorer.” The software creator ensured that it was easy for customers to pay as the window had a ‘Paypal donate’ button right beside the text.Don’t Revise Too OftenAnticipate an increase in raw material and other expenses to avoid multiple re-pricing events in a year. “Every year, we analyse costs and then take a call on whether a revision is needed. For the last two years, we have not revised our prices at all as we realised we could still manage,” says Naikawadi.Stand Your GroundBy using these strategies, these entrepreneurs realised that the impact of price rise on demand was negligible. Naikawadi explains, “Post-price rise, many clients delayed taking our tests so our numbers stagnated for a month. But later, they realised the value-add, that is, individual tests at other hospitals cost Rs 50,000 vis-à-vis our offer of Rs 14,000-17,000.”Also, a dip in demand need not always mean a drop in turnover. Vaid says, “There was a 3-5 per cent decrease in the number of clients because of the price rise but our turnover has increased.” Finally, here’s something to think about – stay firm on the new price point you have just discovered. Chris Guillebeau writes in his book The $100 Startup, “When you base your pricing on the benefits you provide, be prepared to stand your ground because some people will always complain about the price being too high, no matter what it is.” You can send your feedback on smementor@moneycontrol.com or simply post comments below
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