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How to Raise Prices Without Turning Away Customers: Savvy and Diligent Tactics to Consider

By James D. Roumeliotis

Product and service pricing is a tricky strategy and depending on what is on offer − most notably a commodity, price increases can be very sensitive to the average consumer. How does a purveyor dance around this dilemma so as not to tick off its customer base? It takes several savvy and diligent tactics.

Pricing strategies

I begin by going over several types of pricing which a business will consider. These include:

Penetration Pricing: The price charged for products and services is set artificially low in order to gain market share. Once this is achieved, the price is increased.

Economy Pricing: This is a no-frills low price. The costs of marketing and promoting a product are kept to a minimum.

Price Skimming: When a higher price is charged because it has a substantial competitive advantage. However, the advantage tends to be unsustainable. The high price attracts new competitors into the market; however, the price inevitably falls due to increased supply.

Psychological Pricing: This approach is used when specific techniques are used to form a subconscious or psychological impact on consumers. The best example is when setting prices lower than a whole number such as 3.99 instead of 4.

Product Line Pricing: Selling a product at or below cost to incentivize customers and drive other sales. For example, a restaurant might offer a low-priced entrée with the purchase of a drink and dessert — both of which have higher profit margins.

Optional Product Pricing: A method applied to increase the amount customers spend once they begin to make a purchase. Optional ‘extras’, when purchased, increase the overall price of the product or service. Examples include computer printers and single pod coffee makers which mostly have a low initial entry price, whereas the cost of the ‘consumables’ or accessories, like printer ink cartridges and coffee pods, respectively, are much more profitable.

Captive Product Pricing: This occurs when an accessory product is necessary to purchase in order to use a core product. Examples of this include products such as razor blades for razors and toner cartridges for printers. This is also known as ‘By-product pricing’.

Promotional Pricing: Pricing to promote a product is a very common application. There are many examples of promotional pricing including approaches such as BOGOF (Buy One Get One Free), money off vouchers, and discounts.

Product Bundle Pricing: Here sellers combine several products in the same package. This also serves to move old stock. It’s a good way of moving old stock and slow-selling products. It’s also another form of promotional pricing.

Value Pricing: This is based on how much the customer perceives a product is worth. The objective is to make consumers believe they are getting the best value at a fair price. This type of pricing works well for ‘basic’ products that don’t have unnecessary details. Dollar stores are thriving due to value-based pricing on items that normally retail for more elsewhere.

Premium Pricing: Use a high price where there is a unique brand. This approach is used where a substantial competitive advantage exists, and the marketer is safe in the knowledge that they can charge a relatively higher price due to craftsmanship, pedigree and/or cache. Such high prices are predominately charged for prestigious and luxurious products and services.

Variable Prices vs. Fixed Prices:  Also known as “Dynamic Pricing”, “supply/demand pricing”, or “time-based pricing.” It’s a pricing strategy in which businesses set flexible prices for products or services based on current market demands. Examples of this are hotel and airline pricing according to the time of year/season, happy hours at bars (downtime), and TV/radio commercials cost during peak hours. In 2020, due to the start of Covid-19, “dynamic pricing” made headlines when the prices of everyday goods such as toilet paper and hand sanitizer suddenly increased dramatically ─ though this was a combination of demand vs. supply, as well as exploitation by many resellers.

Geographical Pricing: Geographical pricing sees variations in price in different parts of the world. For example, rarity value, or where shipping costs increase the price. In some countries, there is more tax on certain types of products which makes them expensive, or legislation that limits how many products might be imported again raising the price.

The general pricing strategy to be applied will depend on different factors including product or service costs, demand, the types of buyers/target market, or customer perceived value, and external factors such as competition, the economy, and government regulations. Moreover, the consideration is taken with the current stage of its product life cycle along with its distribution and promotion considerations.

Raising prices prudently

First and foremost, be transparent. If you make the effort to explain to your customers that you have hired extra staff to deliver an improved product, or for any other reason, the customer may consider accepting the increase, otherwise, he or she may simply suspect that you are simply doing so out of greed. How you pitch and position your price increases can determine the success of your business. Equally important, when making changes to your pricing, make certain that your staff have bought into the price increases. By supporting this, it will be able to communicate it effectively to your customers.

Following are some low-key approaches to price increases.

In Consumer-Packaged Goods (CPG): Producers often reduce the product/packaging size rather than raise the price to cut costs. However, this can irritate customers as they feel cheated especially when done discreetly. For environmentalists, the optics of this tactic may be deemed effective if the brand can make a case that reducing product sizing results in reducing waste and under-use.

Create Additional Value: When raising your prices, differentiate from the competition by creating additional value for your clients.  For example, if you want to stand out, you should go above and beyond in whatever you are doing so that your customer deems your brand and/or your offering as being superior to that of your competitors. You can add value to a product or service by improving the packaging or the design and adding a storyline. Moreover, refine the total customer & service experience which includes a seamless timely process and/or offer something extra without charge.

Regarding Hourly Pricing for Services: Charge per project rather than by the hour. This will place the clients at ease knowing the total cost is predictable regardless if a project takes a shorter or longer period to complete. It eliminates cost anxiety and lack of control over the actual hours undertaken and lodged by the services provider.

Consider Incremental Price Increases

By applying incremental price increases on a regular basis or on occasion, you will condition clients to expect it. Depending on what you are selling, such as a subscription service, providing adequate notice is the right thing to do. Stating the reason(s) for this imminent outcome is a plus (think transparency). This way, clients can adjust their budgets accordingly. Timing is important as your level of service and customer satisfaction feedback should align with any increase as appropriate justification.

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Diffusion of Innovation: Getting past the first wave of innovators and early adopters to reach the tipping point

By James Roumeliotis

Diffusion of Innovation is a theory which explains how, why, and at what rate new ideas, including technology, spread. The concept was conceived by Everett Rogers, a professor of communication studies, which also inspired his book “Diffusion of Innovations” first published in 1962. It is considered one of the oldest theories in social science. Professor Rogers popularized the use of this premise with the intention of explaining how over time an idea or product gains momentum and grows in use and popularity among a specific population. Consequently, Diffusion is the process by which an Innovation is communicated through certain channels over time among the members of a social system.

What is it?

Diffusion research examines how ideas are spread among groups of people and focuses on the conditions that increase or decrease the prospect that a new idea, an innovation, product or practice, will be embraced by a certain population or society.  This concept ought to be taken in consideration when launching a new product if it is to succeed because no matter how good and innovative a new product is, it is very likely that a few people will adopt it just because it is new or novel.  The initial trend of those who adopt the change or innovation are called the “Innovators.” They represent about 2.5% of the population.

The next level and surge of people represents about 13% who will adopt an innovation, and these are referred to as the “Early Adopters.” Beyond these first two waves is the next portion of the population who represent the tipping point for a system. The tipping point is the moment of truth, the breaking point, and highlight. These are not the easy ones, as the law of diffusion of innovation tells us that you have to comprise between 15% and 18% of a population to accept an idea before you hit the important tipping point. That said, you must get past the first wave of Innovators and Early Adopters so as to accomplish the tipping point. Within the organization, according to Simon Sinek, author of five books, including ‘Start With Why’ and ‘The Infinite Game’: “If you are trying to get employees to embrace a new direction or innovation, it is even more crucial to engage people in the why of the initiative and not just the how.

Why is this beneficial?

The Diffusion of Innovation theory benefits marketers by helping them understand how trends occur. Moreover, it benefits companies in assessing the likelihood of success or failure of their new product or service.

How is it applied?

For starters, it is essential to determine where the majority of the target audience falls as this will indicate their key motivators.  Those insights will help determine how the product is marketed toward them. 

1. Innovators: Innovators are a minor group of people that constantly explore new ideas including technology products. These are the people who are influential and responsible for the creation of products that will then go through diffusion of adoption.

2. Early Adopters: Early adopters are considered as opinion leaders or influencers. They are open minded to change, and often share positive testimonials and feedback about innovations that have left them satisfied, as well as feedback regarding how new products could be improved.

3. Early Majority: People that fall in the early majority category of adoption are basically followers of the early adopters. They take the opinions of the early adopters seriously. As a result, they are likely to perform behaviors such as reading reviews prior to purchasing a product. 

4. Late Majority: People in the late majority category of adoption are the skeptical ones who are not very familiar or comfortable with change. Quite often, those in this late majority category will only accept new products or innovations when they begin to feel pressure from those around them making them feel as if they would be left behind if they do not embrace the new products or innovations.

5. Laggards: They are the most conservative of the bunch. They only embrace new products or innovations when there is no alternative to doing so and often are persuaded to accept by facts found through their own research and reading reviews. Another common motivator for this group is the pressure felt by the other adopter groups.

If you are launching a new product, such as software, you can use the Diffusion of Innovation concept to help you identify the most ideal marketing strategy and approach for each group/category. Although the Adoption theory is beneficial when looking at new product launches, it can be equally useful when launching existing products or services into a new market.

The following is an example of how this concept can be applied to digital marketing strategies (credit: smartinsights.com)
Launching new software to the different groups.
  • Innovator: Show the software on key software sites such as Techcrunch, or Mashable. Providing marketing material on the website, with relevant information and lead to potential sales with downloads.
  • Early Adopter: Create guides and add to the major software sites, providing marketing material such as case studies, Guides and FAQs.
  • Early Majority: Blogger outreach with guest blog posts and provide links to social media pages, key facts and figures, and ‘how to’ YouTube videos.
  • Late Majority: Encourage reviews, comparisons and share press commentary on your website. Provide a press section and social proof with information and links to reviews, testimonials, third party review sites etc
  • Laggards: It’s probably not worth trying to appeal to this group!

The take-away

The diffusion of innovation is important to marketers and innovators because it considers adoption in context of a larger social system. The first two groups on the diagram (the “Innovators” and the “Early Adopters”) are the only ones willing to accept the risk of purchasing a product first, whereas, the other/subsequent groups are willing to wait and have others they trust try it first prior to making a purchase commitment themselves.

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Sources: Rogers, E.M. (1976). New Product Adoption and Diffusion. Journal of Consumer Research. (March). p290-301.

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