Pricing in a business can be tricky (just ask JCPenney).

But so many business owners don't even know the tools available to them.

Today we're going to talk about:

1. 5 strategies for increasing pricing
2. How to communicate your price change to customers

But first, our sponsor.

 

Thanks ​BisonCFO​ for sponsoring this issue.

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5 Pricing Strategies and how to avoid a JCPenney-like pricing disaster

In 2011, in their 4th year of Revenue and Profit decline, JCPenney let go of their CEO, Myron ‘Mike’ Ullman, and started the search for a replacement.

Looking for an outsider to change the tide of the struggling business, JCPenney hired Ron Johnson as CEO. It was a weird, yet seemingly smart choice.

Ron had previously been at Apple, where Ron had been during the release of the iPhone in 2007 paired with the Johnson-led retail store makeover. These two moves transformed Apple’s image to the wider world, making them the IT brand of the time.

It seemed, with this hire, JCPenney was trying to raise its profile and rebuild its reputation as a brand.

Upon announcement of Johnson’s hiring, JCPenney’s ​stock price shot up 17.5%​, with the expectation that Johnson would work some magic while trying to remake JCPenney in Apple’s image.

Ron Johnson started in November and by January they’d announced a drastic change: they were getting rid of their coupons and sales and going to “Fair and Square Pricing.”

With massive changes like this, many retailers do staged rollouts. But not Mr. Johnson. He ran an ad campaign and called it so.

Almost immediately customers hated it. JCPenney’s customers loved being able to find a deal and Johnson made snafu after snafu, almost seeming to scoff at the customers who fed the beast.

By the fourth quarter of 2012, same-store sales had dropped 32% in what some called “​the worst quarter in retail history​.”

After only 17 months with the company, Ron Johnson was fired and former CEO Mike Ullman came in to replace him.

Ullman had a little success turning the tide but was never able to return JCPenney to the growing company of the past.

Pricing isn’t just a price.

I like to harp on the fact that most small businesses are underpriced, but it is understandable. Pricing, and the pricing strategies used, are a part of the DNA of every business.

If a business makes too drastic a change in the way they price, it can “break” the business.

But more often than not, this is an exception.

JCPenney was already struggling and a drastic pricing change accelerated that decline. But it wasn’t just any pricing change, it was a pricing change that attempted to change the strategy and positioning of the business.

I tell this story to say it’s serious. But I also want to remind you: you’re likely underpricing.

So, below I introduce:

1. 5 strategies for increasing pricing
2. How to communicate your price change to customers

Ways to raise prices

Annual increases

Your costs likely go up year over year, so why not your prices?

There are a few big benefits to this approach.

First, people come to expect the increase. When you don’t increase prices regularly, people are more shocked when they get an increase. By having a regular rhythm, they come to expect it.

People also forget the “favors” you do for them. They don’t give you credit for not increasing it over the last three years. They just care when the last one was. If you raise prices twice in six months, all the goodwill from not raising them for three years prior can be gone.

Second, it allows you to capture cost increases quickly. It forces a review and analysis that can often get missed in the busyness of day-to-day work.

When you might not increase prices annually:

1. Economic conditions are bad and costs reduced.
2. Customer loyalty is key and the cost of continued delivery is low.
3. You’re entering a new market or trying to gain significant market share in an old market.
4. Customer switching costs are low and an increase could result in a large number of switches.
5. Profits are good and not raising prices helps create a sustainable competitive advantage.
6. You do mainly project work, which means price increases are captured through new projects.
7. You have a premium brand and frequent price changes could impact the perception of the exclusivity of the offering.

Incremental Increases

If you’ve not increased prices in a while, you could plan incremental increases and communicate them to the customer.

These small hikes give customers time to adjust and reduce the shock of a large increase.

I’d use this tactic when your cost structure changed dramatically.

A good example of this was the shipping issues from 2020 on. Shipping costs went through the roof, which meant drastic increases in cost.

These also allow you the flexibility to make smaller adjustments and adjust to changes in the market.

The key with incremental increases is communicating your reason and plan to the customer.

We’ll talk more about this at the end.

Adjusting product/service offering

Businesses naturally change and make improvements to current products or services.

The tendency, especially with services, is to start implementing the improvements with your current clients.

But adding things to a service without additional pay is a great way to end up with the work being done not matching the scope in the slightest.

I’m a firm believer that services should only be added when they’re for your convenience, not theirs. Add a dashboard and email service that pings the client with updates? Absolutely, that reduces the work of your staff! But offering too much additional free is a great way for them to start expecting free things.

You can avoid this with three different strategies:

1. Creating new product or service bundles, increasing prices over the actual value of delivery but still increasing the perceived value by more.
2. Add new features or services alongside the price increase.
3. Provide cross-selling or upselling opportunities for new products or services.

Bundling can be used to improve the fragmentation that comes with specialized offerings. By bundling different products and/or services, you reduce the complexity of delivery. Sure their price goes up, but they get “more” for that price.

Bundling typically means a reduction in price of the individual item to make the bundle more affordable, but also think about it from a business standpoint. Bundling:

1. Makes delivery of the product and/or service easier
2. Makes use of product and/or service more predictable
3. Can lead to a higher consistency and level of service

By just adding new features, you increase the perceived value of what you do. So, if the feature is desired by the customer, they’re likely willing to pay more. If the feature wasn’t wanted, they have to determine if the difference between the price increase and switching cost is high enough for them to switch. If the price increase is smaller than the switching cost, they’ll likely to stay.

I’ve even seen situations where the customer didn’t want the feature, but could still understand the increase in value offer and choosing to turn down other alternatives.

Last, as you add to your capabilities, instead of opting customers into the new product or service, create a system to cross-sell or upsell them.

This puts them in a position of control but gives you the opportunity to lay out the added value.

The right strategy is going to be personal and specific to your business.

Write out your options in each category and reflect on what feels right for you and test it.

You won’t know until you try.

Increase by customer segments

If your business is serving different types of customers, this could be a great way to test out something new or the reaction to an increase.

By testing on a smaller group, you decrease the impact on the business if there are negative consequences you didn’t intend. If it goes well, the downside is you left margin on the table.

Look at your customer segments and ask:

1. How are these customers materially different?
2. What needs could I address for one segment that doesn’t matter in another?

By understanding the differences in your segments, you can understand their:

1. Price sensitivity
2. Need for additional services

Have a premium customer segment but charge them the same as all others? Increase their price, or even better, improve their experience AND increase the price.

I LOVE pricing based on specific customer segment needs because it allows you to capture more value per customer while also systematizing delivery.

This can also give the perception that you specialize in that type of business, which makes them feel more valued and assign a higher value to what you’re offering.

Consider:

1. Industry
2. Geography
3. Demography

Different segments will make sense for different businesses, but when done right this can transform a business.

Increase on new customers only

If you think your current customers are price sensitive, consider testing new pricing on only new customers.

You can do this by just increasing prices, but you can also do this using the bundling/new service/etc framework above.

Once you’ve seen the reaction from new customers, you can increase prices on existing customers based on that reaction. Maybe you even keep your existing customers below the new customer pricing still.

This is great when new prices are publicized because it incentivizes loyalty from customers. It also, in a way, shows your loyalty too.

Introduce a premium offering

If you have a limited core offering, it could be time to increase a premium offering. Think of something that is easy for you to deliver but has a high value to your customer.

In consulting, this is often done with additional deliverables or access.

With products, this can be done by offering customization or premium finishes.

Tiered pricing changes the way potential customers think of current pricing too, as the lower price can start to appear cheaper in relation to the premium offering.

We may do a pricing psychology issue at some point, but not now. If interested, reply “psych me up” and if enough are, I’ll get to writing!

Once you’ve determined your premium tier, consider offering it to current customers before new ones.

One of the biggest risks with new products/services at a premium level is failing on delivery and wrecking a new relationship. So, by offering it to existing customers first, you help reduce the risk. Your current customers already trust you and are more likely to give you grace.

Communicating your price increase

Communicating planned price increases is actually MORE important than the actual price increase.

Poor communication of price increases can sabotage even the best reasons and break years of trust with a customer. That’s why so many are scared of increases, so let me dissuade your fear: it’s not as scary (or hard) as it sounds.

Just communicate and do it clearly. Below is a framework to follow to reduce the risk of bad communication to close to zero as possible.

Clarify the benefit

I’ve always found that it’s best to be clear why you’re increasing them but to not offer too much detail.

“We’re increasing prices because our supplier's costs have gone up.” Unless it’s an extreme situation, you don’t need to share amounts or “get all intimate.”

No one likes it when someone goes deep too quickly and it opens you up to questions you may not want to answer.

Focus on the value they’ll get. “These increases will allow us to continue to prioritize the best customer service in the industry.” Remind them why they’re doing business with you!

Announce and go

When increasing prices, some customers won’t care and others will.

Announce the plan to increase with ample time for customers to make a switching decision if they may. This is generally at least 30 days.

But, don’t put too much focus on this switch. The ones that need additional attention will come to you. The rest will go about their business. For some, the price change will come and go without a blink. If you instead make a big deal out of it, it could stop them in their tracks.

If you give them a sense they should have a problem, they might create one.

So, give notice and move on. Deal with the questions and complaints as they come and address them with empathy. But for the rest? It’s business as usual.

Offer an out

For those that do have questions, be prepared to give them options. You can’t back off a price increase, but you can temporarily suspend it or offer new terms.

In some cases, offering shorter payment terms could be more beneficial than the price increase in the first place.

Consider your options BEFORE you make a change and be mentally prepared to respond to customer requests.

—

Reach out and let me know:

1. Which strategy would work best for your business?
2. What other questions do you have on pricing?