According to the Wall Street Journal, companies that sell to consumers (like Clorox, McDonalds, and Coca-Cola) are raising prices to take advantage of increased consumer confidence and in anticipation of higher inflation rates.

This news might lead companies that aren't consumer giants (which covers most everyone reading this post, I suspect) to consider whether this is a good time, in general, to raise prices. 

I'm not sure that's a great idea, because basing your price upon economic fluctuations is fundamentally reactive. If you're being proactive in your pricing, you're already extracting the maximum profit from each sale.

How do get proactive with pricing? Here are five basic guidelines:

1. Have a pricing strategy.

Your pricing should be based upon your customer's perception of your product or service. While they obviously don't use a formal model, customers perceive products and services as existing on five sliding scales:

  • Unique ------------------------ Commodity
  • Essential --------------------- Redundant
  • Scarce ------------------------ Commonplace
  • Addictive --------------------- Replaceable
  • Visible ------------------------ Obscure

The moreyour product or service ranks towards the left-hand side of these scales, the higher price customers will tolerate. I explain this concept in detail (and provide examples) in my recent column "How to Price Your Product: A Simple Model."

2. Hit a price point that ends with a nine.

Sure, this kind of pricing sounds incredibly corny but multiple scientific studies have shown that a product selling for $999 will outsell a product priced at $950 (and massively outsell a product priced at $1,000).

Thus when you raise your price, raise it enough to hit the next logical "9". I discuss the science behind this in my recent post "The Old-School Pricing Technique That Still Works." BTW, Apple uses this pricing strategy, so it can't be all THAT corny.

3. Price based on value not cost.

The problem with "we're raising our prices because our expenses have gone up" is that leads the customer to think that the price of your product or service should reflect how much it costs you to provide, rather than the value it provides to them.

While I discuss this issue in the post "How to Sell: Value, Benefits, or Features," there's an old story that perfectly illustrates this point:

A data center goes down, so the CIO calls in a technical expert. She pops the cover off one of the servers, replaces a board, and the data center comes back up. She then hands the CIO a bill for $10,000. The CIO goes nuts. "You only spent 5 minutes here! I want an itemized bill!" She takes the bill back and writes:

Circuit Board: $10

Labor: $10

Saving your company $1m in lost sales: $9,970

Wasting my time by forcing me to explain something so obvious: $10

TOTAL: $10,000

4. Consider a hidden price increase.

Why risk antagonizing your customers with a price increase when you can delight them by appearing to do the opposite? There are five basic methods to accomplish this:

  1. Replace outright purchase with a subscription.
  2. Lower your base price but raise the price of a common option.
  3. Bundle multiple options into a single price.
  4. Offer to finance the purchase.
  5. Re-frame smaller packaging as a larger value.

I describe these methods in detail in my recent post "How Microsoft, Nabisco, and GM Make Customers Happier by Raising Prices."

5. Follow the 3 basic rules for price increases.

Finally, whenever you raise prices, there are three basic rules or principles that will keep you from alienating your customers:

  1. Have a credible reason.
  2. Provide plenty of warning.
  3. Give existing customers a discount.

I provide example of how to execute the principles in my seminal pricing post "3 Smarter Ways to Raise Prices."

Published on: Nov 1, 2018
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