Customers hate price increases. It’s a visceral animosity that just comes naturally. You want to be very careful when raising prices to avoid raising this ire.
For example, I’ve had the same company clean my house for several years now. A little over a year ago, my cleaner raised my rate 5%. I wasn’t happy. I thought about finding a new cleaner but didn’t want to go through the hassle so I sucked it up. A month ago, they raised my rates by another 5%. They accompanied it with an explanation that their costs had gone up, fuel costs. Unhappy and unsatisfied with the explanation, I cancelled their service and began the search for a new cleaner.
It was only 5%. The time I’ve spent time looking for a new cleaner is probably worth more than I’ll save. But I did it anyway. Ouch. This was painful for me and probably more painful for the cleaning company.
What can we learn? Customers hate price increases, so do your best to not increase them. If I could advise my cleaner on their pricing it would be to not raise prices on existing customers, rather raise the rates for new customers coming in. It’s not easy to find new customers and customer acquisition costs are high. Once you have a customer happily paying, make sure you keep him or her happily paying. Raising prices causes many customers to rethink their previously automatic purchase decisions. Don’t do it unless you absolutely have to.
Here is another way to look at this. When I first selected a house cleaner, I likely compared several cleaners, their reputations and their prices. When I chose one, the decision was made. If the price next week is the same as the price last week, well, I already made that decision. Why revisit it. However, if the price next week is higher, then maybe the decision I originally made should be changed. Maybe I should revisit the topic. Of course this is the rational explanation, but let me assure you that my decision was also emotional.
From the cleaner’s perspective, it is always possible I was a “bad” customer and my cleaner was happy to see me go. In that case, he did the right thing by raising my price. Either I pay more and he’s happier, or I leave and he’s OK with that. If you have to raise prices, consider only raising prices on your “bad” customers, the ones you would not be unhappy to see leave.
My cleaner attempted to do one thing right, he blamed the price increase on rising costs. Unfortunately in his case it wasn’t credible. How do higher gas prices significantly effect the cost of cleaning my house? After all I’m paying for the electricity they use to run the equipment. Customers are more likely to accept price increases when you can justify that your costs have gone up. The justification has to be believable.
All pricing situations are different. If you have a situation where you have loyal customers that purchase over and over again, then here is a summary of the lessons to learn from this house cleaner situation.
- Don’t raise prices
- If you have to raise prices, do it selectively. Consider raising prices for only new customers or “bad” customers.
- If you still have to raise prices, justify it with increased costs.
The Pragmatic Pricer – Mark Stiving