by Adam Juda on Tuesday, January 2, 2018
Do you want to raise your prices?
A company that raises its rates must make a decision. Should it grandfather its existing users into the old pricing scheme, or should it demand higher payments from both new and existing customers?
Many firms prefer the former, because it looks inherently safe. They grandfather existing users because they think that existing customers will balk at paying higher prices. Keeping their prices low will prevent them from going elsewhere.
Grandfathering prices is anything but safe in the long run. It simultaneously erodes a firm's potential profitability but, at the same time, it reduces firms' incentives to maintain high levels of customer satisfaction amongst the existing customer base. It also serves as a public admission that the firm's new pricing far exceeds the value delivered.
Fortunately, there are many tools to soften the sting of a price increase. One of the most effective is the price increase letter. It's exactly what it sounds like: written notification that prices will go up.
What should a price increase letter include?
A price increase letter has to accomplish far more than announce that a vendor is increasing its prices. It must convince the existing customer base to accept the change in prices too.
Let's take a look at a few items that increase the effectiveness of a price increase letter:
A show of remorse
It's important that vendors demonstrate that they do not enjoy raising prices. Shoppers do not like greedy companies or those that use their market power to force higher prices upon their loyal buyers. For that reason, it's important to demonstrate that any increases in price are not only heartbreaking to the company, but they were implemented only as a measure of last resort.
A passing of the buck
It's often beneficial to deflect the blame of a price increase onto a third party. Doing so will help in three major ways:
- It will further the message that the increase was not willful on the part of the vendor.
- It will redirect any ire or aggression on the part of customers away from the firm.
- It will cause readers to assume that the factors leading to the price increase are common across the industry.
Some writers will feel pressured to provide a financial analysis, but this level of detail should be avoided. It is often simply best to explain the situation without delving into the minutiae. Not only will this lead to a simpler narrative, but it will allow firms to raise their prices well above those warranted by the reasons disclosed.
Differentiation from the competition
Most customers have some degree of price sensitivity. The more prices increase, the more likely a given customer will start looking for a new vendor. Therefore, it is essential to convince customers that the vendor (or its offering) is superior, preferable, or in some way more desirable than the alternatives.
A destruction of existing price anchors
A firm's original price structure can act as a terrible foe when it raises its prices. This is because the old price list acts as a price anchor in customers' minds. It's important to demonstrate that the value delivered by the firm is well in excess of both the original price and the newly revised price.
A personal connection
Many small business owners attempt to distance themselves from their price increases. Otherwise, friendly and approachable business owners become emotionally distant when discussing changes to their pricing. They feel guilty, embarrassed or fear the retribution of their customers, and believe that an increased formality will somehow shield or protect them.
This temptation should be avoided at all costs. Bad news should always be delivered in a personal way.
Language speaking to the length or intimacy of a business relationship will help reinforce the bond between vendor and customer. Depending upon the size of one's client list, personal anecdotes relating to each customer can be woven into the narrative and drive the existence of a personal relationship home.
Impersonal phrases like the following serve as strong signs that the messaging of the letter is too antiseptic:
- Dear customers,
- Dear Sir or Madam,
- Loyal customer
- Industry best practices
- Industry surveys
- Modest price increase
A positive spin for the customer
Firms should attempt to put a positive spin on any price increases. The best way to do this is to demonstrate that the customer will be better off in some way, once the increase in prices takes effect.
Vendors should avoid the temptation to describe specific increases to their offerings' value propositions in order to justify an increase in price. Such discussion will prompt customers to ask a very dangerous question:
Is this newly bundled offering worth the difference in price?
For this reason, it may be best to remain vague and appeal to emotion.
An open line of communication
Offering a personal communication channel to the sender will make people feel more highly valued and more connected to the firm's management team. Even though the vast majority of customers will never bother to make contact, the fact that communication channels exist will provide a big boost to customers' feeling of a genuine relationship.
What shouldn't be included in a price increase letter?
Now that we understand what needs to be included, are there any items that shouldn't be included?
I've read through a number of such documents and I see a handful of mistakes that keep appearing.
Information regarding future price increases
I once received a price increase letter that contained the following: "we will continue to monitor our increasing costs and will adjust our prices accordingly."
This language is dangerous and will likely lead to increased customer attrition.
It does nothing but elevate the fear on the part of customers. Rather than softening the blow of a price increase, it magnifies customer uncertainty by alluding to price increases that have not yet been put into effect.
Customers who are willing to accept the current price increase but are fearful of additional increases will be motivated to examine marketplace alternatives.
A dare to the client
A well=written price increase letter will convince customers that it is not worthwhile to investigate alternative providers. After all, the more customers search for alternative vendors, the more likely they are to find an offering that better matches their needs and budget.
Firms that take a bold stance by writing something akin to "feel free to price shop our offerings" may believe that their bold language signals great confidence. In reality, it merely increases the odds that existing customers will open communications with other vendors. In other words, such language will deliver a group of highly qualified leads to one's rivals while, at the same time, reduce the vendor's own potential revenue.
A collection of hopes, desires, dreams, and wishes
It is important to remember that a price increase letter is intended to convince readers that a price hike is worth accepting. Closing with a statement like "I hope you'll continue to stick with us" will only serve to weaken a vendor's credibility and convince readers that other options are worth investigating.
Once the letter is written...
Vendors shouldn't just send their letters as soon as they are written. There are a few other matters to consider.
Examine existing cash flow
If a vendor would benefit from increased cash flow, a price increase letter can help immensely. Any firm that announces a price increase, but allows prepayments at the existing rates, will likely enjoy a strong infusion of revenue. Many customers will see such offers as desirable discounts and a no-brainer.
Trial balloons are a very good thing
Vendors should avoid sending all of their price increase letters at once. It's often better to send a few out at a time. Not only will this practice reduce administrative burden on a firm's office staff, but it will provide early feedback as to whether the messaging was sufficient before damage is done to a large segment of the existing customer base.
A firm stance
No matter how well written a justification letter might be, there will be some customers who become enraged and demand concessions. Firms that bow to such pressure will erode their pricing power, because word always gets out.
Customers are becoming trained to tell vendors that they will go elsewhere unless their prices are reduced. Many of these threats are completely empty. Nevertheless, as customers learn that an individual firm will bend to threats, the number of demands for price reductions will assuredly increase.
Examples of price increase letters
There are many ways to write a price increase letter, but examples are always helpful.
Remember, however, that the style and content of such a document will depend upon a great many factors including the industry, nature of the offering, and the firm's relationship with its customers.
An example of a terrible price increase letter
This letter serves as legal notice that your rates will increase by 10% as of January 4th. Please be advised that your next bill will include the revised charges.
A careful analysis has informed us that our rates are among the lowest in the nation. As such, we've modified our pricing.
Respectfully,TapRun Industrial Services "The company that cares"
An example of a good price increase letter
Fred and Wilma,
Thank you so much for trusting us with your pool service for the past five years! Being able to spend my days keeping families like yours safe and happy has been a dream come true.
Unfortunately, the cost of pool cleaning supplies keeps going up, and to continue providing you with the highest levels of service, I'm being forced to raise my prices by six dollars per cleaning.
This isn't a decision that I made lightly, and I know that it isn't something you'd want to hear. Nevertheless, I've worked hard to provide you with the absolute best prices that I can.
The increase will help us ensure that we're able to continue to use the safest and most environmentally-friendly chemicals for you and your family.
If you have any questions or concerns, please don't hesitate to reach out to me by email or phone.
Thanks for your support, and I look forward to our continued relationship.
Founder, TapRun Pool Cleaners
email: firstname.lastname@example.org: 404-555-xxxx
Raising prices for existing customers can be scary and dangerous, but it is often essential to a firm's bottom line. Price increase letters can reduce this risk and should be considered an important component of any pricing change.
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