How to Tell Customers About Price Changes Without Upsetting Them: Top Price Increase Strategies
There is no greater method for a retailer, regardless of size, to irritate their customers than by raising prices. However, there are situations when you might find yourself needing (or wanting) to do precisely that. Behavioural economics can be useful in helping you navigate the challenging process of delicately raising your rates. The important thing to remember is that consumers are often quite sensitive to whether they perceive a pricing to be fair or unfair. By focusing on this experience, you may make your customers feel less irritated.
Price fairness is the first price increase strategy.
Although the concept of “price fairness” is somewhat nebulous, in general it refers to the related perception that a product’s pricing is about right. You’ve formed a price fairness judgement when you walk past (or scroll through) a product and you quickly feel like it’s overpriced or that it’s shockingly affordable. It is sensitive to the customers’ current emotions because we typically think of this as an emotional reaction to price: happy customers are more likely to believe prices are fair.
A 1986 work by behavioural economic powerhouses Daniel Kahneman, Jack Knetsch, and Richard Thaler provides a thorough analysis of consumers’ views of price fairness. The authors performed an extensive series of telephone interviews where they posed hypothetical questions regarding concerns like pay reductions or price hikes in industries including grocery, photocopies, and real estate. One of their most unexpected findings was that consumers were, on average, remarkably sympathetic. They asked these people to rate how fair or acceptable certain corporate behaviours would be.
Dual Entitlement is the second price increase strategy.
Recall how customers perceive prices as being more reasonable when they favourably compare to a reference price? According to research, 75% of customers believe that retailers should also be entitled to “fair” levels of profit. In other words, if a business was producing $X in profit but their costs increased, customers would agree that it was fair for prices to rise in order for the business to continue making $X in profit.
In fact, the majority of consumers thought it would be fair for a company suffering losses to totally move those costs onto its customers. Consumers indicated that price rises were acceptable as long as the company was upfront and honest about the reasons it had to increase prices (and those reasons were good).
This concept of reference profit entitlement comes with a few restrictions:
Consumers may concur that retailers have a right to a reference profit, but that does not mean they will concur on what that reference profit should be. Consumers may instead choose the earnings of the competition as the most pertinent reference if a company is already making more money than a close rival. Successful and lucrative businesses will typically be perceived as having less of an excuse to raise prices. In a sense, they are making a fairness judgement on how to make another fairness assessment (consumers see profitable companies as about 3 times less justified in raising prices as compared to companies losing money).
A company shouldn’t raise prices in expectation of declining profits. For instance, 79% of consumers would believe it is not justifiable to raise the price of your products that are currently in stock if you know that the wholesale cost of a product will increase at some point in the near future. In order to legitimately raise prices, a corporation must be in a situation where its earnings are actively at risk.
Price Increase Strategy – Explain!
The primary rule of fair behaviour, according to the article, is unquestionably that one person should not make a benefit by merely imposing an equivalent loss on another. Explaining the cause for the price rise will win over customers’ compassion more effectively than ignoring the problem or making a tiny concession in addition to the price increase. Customers are far more tolerant of price increases when they recognise that there was a need for them.
Additionally, this means that retailers must take care to never give the impression that they are abusing their position in the market. In the most well-known example from this study, participants are asked to picture their town having just experienced a significant snowstorm, and as a result, a hardware shop raising the price of snow shovels. This makes sense economically because buyers value snow shovels more, therefore the retailer is smart to charge more for them. Even when they need and can afford the shovel, consumers are less likely to purchase it and are undoubtedly more likely to recall this unfair practise in the future because 82% of consumers view this as an abuse of market power.
What can a poor justification look like? In its announcement, Netflix stated that the price increases will “allow us to acquire more content and create an even better viewing experience.” This justification is ambiguous and makes no reference to any underlying expenses or losses that a price increase would be intended to cover (even if there is one). It would be fascinating to observe how consumers respond once the price hikes go into effect because it doesn’t do much to alleviate the unfairness that new customers will feel as they pay the higher pricing.