I suggest you increase your prices dramatically and, hopefully, you’ll lose some customers!
That’s fine. Because the customers you will lose are not in love with you, just your low prices. The ones you will not lose are those who really want to buy from you, because you’re better than the alternatives on offer. In other words, you’ll retain customers on the basis of your competitive advantage. They value the way you are distinctive.
Pricing policy goes hand-in-hand with selecting the right kind of customers. By increasing prices you can deter the wrong kind of customers, which is half the battle. Increasing prices forces us to find the right kind of customers. In fact, increasing prices forces us to make strategic decisions.
When working as a management consultant with my clients I sometimes set up the following scenario as a way of thinking through the development of an effective and profitable marketing strategy. I play the role of the new owner of my client’s business – and dictate to them that as from today they must increase prices threefold. That’s a command, not a suggestion. The first reaction of my client is despair – they know they’ll lose many customers and are unsure how to win customers who will buy at the new price level. Still acting in the role of a dictatorial boss, I tell them to come back in three weeks time with new customers, who will buy at the new price level. This means that the business is forced to differentiate itself from competitors, to play to its strengths, to find the market niches in which it can have a near-monopoly, and to avoid those products or services that rivals can also offer. It forces the business to identify its competitive advantage and find the customers who want what it can uniquely offer.
Often a client’s reaction to this imposed price increase is to say: ‘Nobody around here will pay that price!’
To that, my response is: ‘Then don’t sell to customers around here!’
Perhaps the best market for our products isn’t local. We need to challenge the assumption that our current market base is the correct one.
Another response is that with a higher price, sales will drop. That’s okay I say – at a higher price we don’t need to sell as many. Perhaps we can make more profit from fewer sales, but at a higher price. Again this provokes question about profitability.
Most importantly though, by imposing a price increase in this way, the team managing the business is forced to address the issue of how on earth it can compete with rivals. You have to find something of value that rivals can’t offer to be able to justify the higher price to customers. You have to make sure you have some point of difference that competitors can’t replicate, and that customers value. You have to distinguish yourself from the crowd, and find customers who value that distinctiveness.
If, after due consideration and research, we simply can’t answer the question of what will justify a higher price, it means that we are coming to a worrying conclusion about the ability of the business to compete. Perhaps we’re selling a near-commodity – we are not really any different than our competitors, and consequently we are condemned to competing on price. The only way to proceed if this is the case is to drive down costs, keep prices as low as possible, and increase sales to compensate for loss of profit margin. Competing on price in this way can be done, but it’s not ideal.
On the other hand, if we can identify something at which we excel in relation to competitors – if we can differentiate ourselves in a way that customers value – then we’ve found our competitive advantage. At this point we are half way to success. The next stage is to find those customers who want or need the particular thing at which we can excel.
So, put up your prices, because this will deter the wrong kind of customers. It won’t deter customers who really want what you can uniquely offer. This change of prices will influence your market positioning and the perception of customers – it could be an opportunity to refine your marketing communications, or even fundamentally review your business.
A word of warning! You may not be able to increase your prices with current customers because of existing contracts or because it could jeopardise goodwill. A new pricing policy may have to be implemented only with new customers.
The question of raising prices also inevitably brings about a useful discussion about marketing strategy and indeed the underlying business strategy – the competitive advantage of a business in relation to its rivals, and the validity of its customer base.
The boardroom strategy game of imposing a significant price increase provokes a more fundamental and important exercise of finding the unique business formula. This business formula is based on the answer to two questions:
• At what can we excel in relation to competitors?
• Who are the particular customers who want the thing at which we excel?
Key Points
An imposed increase in prices would mean losing some customers – but only those who can go to cheaper rivals. We need to focus our business on things we can do that rivals can’t, which enables us to increase prices – with the right kind of customers.
What to do next