Almost everyone I talk to about these things feels this way when they prepare to raise prices. We know we might lose a few, but sometimes people get this wild idea that they’re going to lose 80% of their customers because of a price increase. Are you really providing that little value to your customers? I doubt it. I suspect you know your customers better than that. In my experience, it simply doesn’t work out that way. You’ll probably lose some but the math will probably work out with you doing less work and making more – even if the increase is small.
So how do prices get like this?
There are many reasons, including an addiction to coupons, not paying attention to margins, missing the impact of step costs as volume increases – among others. The two reasons I see most often are “we can’t do it now” and inattention. When I say inattention, I don’t mean anything specific. It’s as simple as not taking a regularly scheduled look at prices, costs, margins, etc – and then doing something about it when you find something wrong.
Back to the person who asked the question. They indicated that their customers had been paying $29 a month for between 15 and 20 years with zero price increases during that time. I don’t know how many customers they have – I didn’t ask because it doesn’t matter. I assume they are at least marginally profitable at that price level – or were until recently.
Given that customers have been paying $29 a month for 15 to 20 years, they either see $29 as a no-brainer value-wise or they are the type of person who never looks at their bank statements. If you have 1000 of them and 10% leave, you’ve lost $2900 a month. If you raise the price to a mere $32, you regain more than the $2900. But we’re not going to do that.
Stop the bleeding
First off, you have to keep things from getting any worse. Start by determining a fair price with a reasonable margin for new customers. If this is your entry level pricing – figure out what can be removed from it and remove it from that lowest tier. Do it now – before lunch. You should know what can be removed after 20 years.
Your entry price still needs to be a no-brainer, but it shouldn’t include every single thing you do. If you aren’t sure, ask whoever deals with customers all day. Sales, support, service – whoever. Ask them specifically. What portion of our services do our new customers rarely use or not need? Of the things that remain, are there any that create a significant hassle? Pull that one too. Your entry level customers should not have high support costs – and you should work on that next if they do.
Change that price and the explanation of accompanying services right now – before you do anything else. Once you do this, you know that whether you get 10, 100 or 1000 customers in the next month – it won’t be making things worse.
It doesn’t matter how the old price compares to the new one. It simply has to make sense to new customers. Maybe the old price was one percent of what the new price is. It doesn’t matter. What matters is that your new customers see value in what you deliver for that price.
The hard work
Before we worry about the old customers and their $29 price, we need to finish setting the new pricing. Get together with your team and see if you can group the customers you’ve gotten in the three years into a few segments. Don’t get complicated here. You can always do this again later – and you might.
Maybe you have customers new to the industry and for them, the entry service level (and price) is ideal for them. What other natural groupings do you have? Your people will know if you don’t. Ask them questions and do not interrupt. Listen. Take notes. Say “tell me more” or “is there anything else” until they’re done. Let them empty their minds on the table. They’re on the front lines. They may not know your costs or margins, but they know your customers.
Discuss what those groups need of the service levels you offer. Don’t make things up. Use data and conversations to drive decisions. Review the decisions with the team to make sure the grouping of services to a particular customer segment makes sense.
We’ll finish the hard work next week.
Mark Riffey is an investor and advisor to small business owners. Want to learn more about Mark or ask him to write about a strategic, operations or marketing problem? See Mark’s site, contact him on LinkedIn or Twitter, or email him at email@example.com.
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