Business owners often worry that if they raise their prices, they'll lose customers and understandably so, since customers are likely to feel gouged when told they must pay more money for the exact same product.

This puts business owners in a dilemma. If you can't raise prices, your profit goes down ever time your costs-of-goods goes up. And even if cost-of-goods is the same, you're losing profit if you're not getting the highest price possible for whatever you're selling.

Most companies are really bad at raising prices. Typically, they attempt to explain the rise in price as that's regrettably necessary but outside their control. Like this:

"Due to economic conditions, we are forced to raise our prices. We are sorry for any inconvenience that this might cause."

Such excuses don't just sound hangdog, they're also only effective if the customer trusts you when you imply that raising prices is the only possible way for your firm to adapt to "economic conditions" (or whatever excuse you're using).

Smart companies never apologize for raising prices. Instead, they reposition the increase as a customer benefit. Their goal isn't to get the customer to say "I forgive you for raising prices" but instead to say "Wow! Thanks for raising your price!"

Sound impossible? Well, here are five way that the big guys pull off this neat trick:

1. Replace outright purchase with a subscription.

A very old sales trick is to make a large price sound smaller by stating much it costs per day. For example: "Yes, $700 sounds like a lot of money but that's less $2 a day for a year... about the price of a cup of coffee. And you'll be using this product for a decade!"

Subscription pricing builds that basic idea.  The customer sees "$9.95 a month" for a product that used to cost $250. The customer thinks: "Wow! That's a real bargain. Thanks for dropping your price!" In fact, the customer  ends up paying more in the long run.

Take Microsoft Office, for instance. It once cost as much $800 for a single license. Today, you can get a license (for use on multiple machines) for a seemingly measly $10 a month...with free updates. Great deal, eh?

Well, maybe not. Office hasn't really changed for the past 10 years, except for becoming more confusing through feature-creep. If you pay $10 a month for 10 years, you've just paid $1,200 for an $800 product. Few customers do the math, evidently.

2. Lower your base price but raise the price of a common option.

This is the general case of the specific method Burger King uses to get people to pay $.50 for a slice of cheese that costs less than $.15. 

To recap, Burger King charges $.50 extra for a piece of cheese--a price that's not listed anywhere. The charge is added after the customers says "Yes" to what seems like helpful customer service: "Do you want cheese with that?"

This works for other types of products as well. For example, a software company might lower the price of a user license but increase the price of the service contract. Ideally, they'd make the price increase less visible changing subscription window, like from "$1,000 a year" to "$25 a week." 

The trick to this strategy is to publicize the drop in price not the increased charge. The airlines bungled this when they added baggage fees. They positioned it as an add-on fee, with an apology about "gas prices going up." Dumb.

A better approach would have been to announce a discount for people who don't check baggage. That way, flyers might have felt grateful to the airlines for giving them a better deal if they pack light and haul their own overhead bags.

3. Bundle multiple options into a single price.

The idea here is that you reduce the customer's burden of decision-making (a good thing) by bundling options into packages, which are priced with a higher profit margin than would be possible if you charged for them separately.

The automobile industry uses this method to increase the margins on car sales. Customers can order a base model but with upgrade packages that have a couple features most customer want along with some "meh" options they end up paying for anyway.

As with all of these methods, the trick is publicizing the lower price and positioning the packaged options as a convenience and benefit (e.g. "the ultra sport package") rather than a way to sell some high margin options that most people don't really want.

4. Offer to finance the purchase.

In this case, a large chunk of extra profit comes from the finance fees and loan interest rather than from the sale of the product itself. You position the ability to get on-the-spot financing as a convenience rather than a profitability bump. 

Again, automobile dealerships do this all the time. For example, when I bought a Honda recently, the dealership gave me a very competitive price on the car, but then handed me over to a very senior salesperson when it came to the financing, clearing hoping to sell me the loan as an add-on. (I self-financed, so she was disappointed.)

I've also seen this kind of financing offered for large computer hardware purchases or indeed for any big ticket B2B product. Of course, such sales usually involve buyers who are more sophisticated than your average consumer and probably understand that the financing is an "add-on" rather than a service.

But consumers, not so much.

5. Reframe smaller packaging as a larger value.

This is the go-to "please the customer" price increase for the food industry. They decrease both the price and the amount of product so that you get even less product for a lower price. They then advertise the new size as superior to the old packaging, even though the consumer is paying more.

For example, a company might reduce the amount of product in a standard package from 16 oz to 14 oz and change the labeling to claim it's "healthier" (because it has less calories), "extra-portable" (because the package is smaller), or "more eco-friendly" (because it uses 2% less paper.

Products cited in the New York Times as executing this strategy include Chicken of the Sea, Doritos, Tostitos, Fritos, Nabisco Premium saltines, and Honey Maid graham crackers. 

As with the other price-increase strategies, the emphasis is always upon creating the perception of a better value so that the customer embraces the price increase, usually without even realizing that they're paying more.

It need hardly be said that ALL of these strategies are excellent illustrations (as if we needed them, given the state of the country) that "nobody ever lost money underestimating the intelligence of the American people."

Published on: Jun 2, 2018
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