Price Increase Conversations
Price Increase Conversations don't have to painful! Keep your clients and have a smoother conversation with these tips.
# 1: The Why
Price Increase Conversations
Let’s talk about price conversations: how can you break the news to a customer that the price for your product/service is going to increase while
- 1. Keeping a good working relationship
- 2.Preventing them from going to your competitor
- 3. Maintain your contracts and renewals with them
In this series, we’re going to cover the psychology of a price change as well as many strategies and tactics to keep your clients happy even in the face of bad news.
The most important, foundational, aspect of the price change is explaining the ‘why’ of the price increase. At this point, people logically understand why you’re raising the prices on them. Emotionally, they might still be taken aback.
Let’s say you have to tell a client that your prices are increasing on a product you manufacture. You could say something like this:
“Mr. Customer, we pride ourselves is using the best material to deliver high quality products. We’re raising our prices to be able to cover those costs while still maintaining high quality. We believe that a higher quality translates to lower ownership cost on to you.”
Basically you’re telling the client that you are raising the prices but it will benefit them in the long run.
For equipment costs:
“As we move to become more efficient without sacrificing quality, we’re installing new equipment to improve our turnaround time to you and we’ll be able to increase our prices. Our goal is to get your products to you faster and meet your target goals or your end customer goals.”
Notice how I always tie it back to how the end customer will be positively impacted in the long-run.
New hires
“As demand from clients like you grows, we will be increasing our prices BUT I think you’re going to see a dramatic improvement in our ability to handle calls and be more responsive to your needs.
You’re highlighting that yes, prices are going up because of new machines, new equipment or new hires, but at the end of the day it will benefit them. If you talk about these points, they’ll be more accepting of price increases.
The important takeaway is that you emphasize how the price increase will benefit them.
# 2: The Drip Method
Price Increase Conversations
Next up is the socialization tactic – aka the ‘drip method’ – that’s where you begin dripping the information that price increases are coming.
You can slowly prep your clients for an impending price increase in the future. You can send several email campaigns, calls, or notifications of what to expect. It’s almost like a ‘price increase campaign’ you’re starting by frequently mentioning that the prices might be going up.
Then, you can give them reasons why they’re going up (see #1).
By not dropping the news on them cold, you’re prepping them for the inevitable and they won’t be as shocked when it finally does happen.
Begin to mention supply chain, product costs, equipment costs, etc that are bound to drive prices up. You’re giving your clients time and space to socialize the price change in their minds.
# 3: Anchoring
Price Increase Conversations
As you begin to mention price increases to your customers (as in Conversation #2), you can drop a reference point for the price increase. Mention to customers that you’re looking at a possible 15% increase by the end of the year (or quarter/ month).
Customers may begin to push back and be surprised.
When the pricing does finally increase, you can deliver news that the prices are only increasing for them by 10%.
What you did was anchor them high (15% increase) and then drop it down to 10%, your customers will feel a sense of relief.
If you have an idea of how much the price increase will be, maybe bump it up a couple of percentage points and when you drop the news, the customer will be pleasantly surprised by a lower price increase rate.
The anchoring effect is very powerful because you’re setting a high metric, and knowingly come in with a lower number.
Some have asked, “is this manipulation?”
No, it’s not.
It is more about understanding human nature, if you know your prices are going to increase by the end of the year, it’s better to err on the higher side of the estimations so the customer can budget for a price increase. Customers will be caught off guard and unhappy if you start low and then present a higher price increase. They won’t have time to budget and they’ll feel tricked into a higher price.
It’s much better for you and them to give a slightly higher percentage estimate before the price increase goes into effect.
# 4: Extend & End
Price Increase Conversations
Extend means you extend the contract’s term period and current pricing. Then you set an end date for those terms.
How does this work?
You extend the terms of your current pricing temporarily to existing clients for a set period of time (while always giving them a reason)
“Our prices go up next week by 10% BUT for you,( existing client, preferred client) we’re going to honor the existing pricing for the next 90 days”
“Here’s our new pricing, but please note, as our preferred client, the pricing we currently have will be extended for another 90 days”
“As of last month, we’ve changed our pricing. In order to minimize the impact on your budget, we will hold off on the price increase for the next 3 months”
These statements give clients extra consideration for their loyalty to you while dropping the news of the price increase. More than likely, clients will be grateful for the extension.
If you have proposals to send out, you can tell the customers that you’ll honor those terms for the next 90 days. This gives your clients the option to take advantage of the old pricing. Clients won’t feel coerced or blindsided.
“You don’t have to put in an order/ sign this contract within the next 90 days, but if you want to take advantage of this pricing, you have that opportunity”.
This makes your client feel like you are trying to honor the contracts, give them options, and consideration for their budgets.
# 5: Price Creeping
Price Increase Conversations
Price Creep works with small, incremental price increases. For example, every 6 months you increase the price by a small percentage.
Let’s say you may want to increase the price by 8% in total. What you can do instead of dropping the 8% increase on a client all at once, you can increase the price by 2% every 6 months (or month/ quarter/year – the increment is up to you).
A lot of large companies use this strategy to increase their prices because they know customers would rather see a small % increase over a long period of time, rather than wake up one day to a big price jump. This lessens the impact on clients’ budget and planning and the client can plan ahead accordingly. You’ll also avoid sticker shock. By doing it over time, the customer gets used to the slight price increases over time.
- Through the years, you condition the client to expect a small price increase and they’ll consider it as a part of doing business with you. You won’t have to ‘break the news to them every couple of months or years with this method because it will already be expected.
- Clients are used to this cadence and can budget for it in the next year/ quarter. This reduced sticker shock anxiety and outrage at higher prices.
The only warning I would give is not to price yourself out of the market (even if you are increasing prices slowly). Sometimes, this strategy is so gradual that we *might* not notice that we’re pricing ourselves out of the market.
# 6: Compliance Trigger
Price Increase Conversations
There is one word that will help you have a better price increase conversation.
Is that even possible?
Yes!
Let’s go back to 1977 at the Harvard research lab where Ellen Langer and her team conducted an interesting study.
They tested their hypothesis in an office setting where people were lined up for a copy machine. What they wanted to test was what verbiage would be most effective in letting someone cut to the front of the line.
Version #1: Request only
“Excuse me I have 5 pages, may I use the Xerox machine.”
This had 60% of people said ‘yes’
Version #2: Request + Reason
“I have 5 pages, may I use the Xerox machine because I am in a rush”
By adding a reason, compliance went from 60% to 94%.
Version #3
Same request, but with a fake/obvious reason.
“Excuse me I have 5 pages, may I use the Xerox Machine because I have to make copies”
(Everyone in line at the copy machine is there to make copies, so the reason given isn’t exactly valid.)
Despite that, the compliance rate was 93%.
From this, we can learn that just by adding a reason (‘because …’ statement) you can increase compliance significantly. Langer and her team figured out the key trigger for compliance was the word ‘because’.
We can use this strategy in price increase conversations when we tell clients that price has increased because of XYZ reason, we can expect an increase in acceptance. When the client knows the reason for the price increase AND it sounds reasonable, their resistance to a price increase will decrease.
Let’s put it in context; “Mr client, we need to increase our prices because _________”
A good reason could be in today’s economic environment, inflation and supply chain issues are driving up the prices of everything.
Here is a bad reason: “We need to increase our prices because we’re opening up a new facility.”
This is bad because it doesn’t tie it back to the client, it sounds more like an imposition than a valid reason.
# 7: Compliance Trigger
Price Increase Conversations
When you’re going to increase the price the customer will have some resistance. The key here with this Tradeoff strategy is simple.
This is to offer the client something in return. The price has to go up, but what can you offer them to alleviate the pain of the increase a little bit.
What can you trade-off?
• Discount on other nonessential products or high margin product.
• Offer something free, like free live training. You can record the training and then put it on a learning management platform that will allow them to access it anytime and view it in perpetuity
• Offer them a loss leader. A loss leader is a product that maybe you’re thinking of phasing out. It has less importance, you’re trying to get rid of, or something that doesn’t cost a lot to produce.
• Preferential service/treatment. We’re going to increase the price BUT we’re going to give you this service/ treatment/ access only given to preferred customers like yourself.
• Give them elite phone customer support service, usually only offered at a higher tier.
• Work out extended payment terms. Is there anything you can do on the payment side to help them? Extend the terms of your old pricing, payment plans, etc.
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