March 9, 2011

At some point, every company wrestles with the question of how to increase prices without losing many of their customers. For small businesses, this issue can raise many problems, especially if their original strategy was to offer products or services free of charge or at incredibly low rates.

Unfortunately, it is almost certain that some customers will abandon a brand once they catch wind of a price increase. Price increases that are well executed, however, can help companies hold on to loyal customers and even gain new ones in the future.

Here’s how to boost your prices and keep your clients.

Be honest.
If you are genuinely losing money and need to increase your prices in order to stay in business, explain to your clients that your current price model simply isn’t viable. Nearly every industry has been affected by a continual rise in gas and food prices and some businesses just can’t afford to absorb those expenses without passing some of it to their customers.

Keep in mind, though, that people have a very limited tolerance for price increases. “If your idea of “reasonable profit” isn’t reasonable or if the price increase makes you more expensive than the (otherwise identical) competition, customers will bolt big time,” warns BNET columnist Geoffrey James. “They’ll figure that the real reason for the price increase is that you’re too stupid to run your company efficiently — or that you just want to remodel your kitchen.”

Try the Freemium model.
A combination of the words “free” and “premium,” the freemium model involves offering a basic product or service free of charge while charging a premium for advanced features, functionality, or related products and services.

The catch is offering a new feature or service that really is worth more than the free version. Also, take your time before springing the premium model on customers. “Keeping free users engaged is essential to converting them to paying customers down the road,” Ranjith Kumaran, founder and chief technology officer of YouSendIt, tells Bloomberg Businessweek. “Many businesses try to extract value within the first 30 days and then bail out without...creating value over multiple engagements. You need to give the right offers to the right customers at the right times to be successful.”

Introduce a new pricing model. Try persuading customers to purchase subscription fees rather than long-term licenses. The customer ultimately ends up paying more, but less up front, making the price increase more palatable.

Warn customers in advance. Customers do not react kindly to a surprise rate increase. Soften the blow by offering plenty of advance warnings. Dividing the increase into several smaller increases over time may be easier for your clients to accept rather than one huge spike in price.

Related Topics

• Money

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Judith Aquino, Article, increasing prices, pricing, customer relations, financial management, Business Insider

Join the conversation ( 2 )

• Thomas Langan 1 year 2 months and 19 days ago

  

  Value adding when increasing price can also show consideration to customers/ clients. Adding an aspect to the service that may have little or no extra cost will change the perception of the price increase.Also existing customers are there for a reason, it can help to gently remind them that price increases are necessary to maintain the levels of service and standards that they expect.

• Molly Griffin 1 year 2 months and 20 days ago

  

  Great tips! I had just read an article that offered reasons for why businesses should raise prices, but this article does a better job of providing tips on how to do it correctly. I know here at Dydacomp, a number of our small business clients are very apprehensive about raising prices, however with higher raw materials and gas prices, many do not have another option.Thanks!Molly Griffinhttp://www.dydacomp.com