Preparing for Price Hikes Ahead

By Barbara Findlay SchenckBusiness on Main

Businesses are veering away from the deep discounts of past years and moving towards gradual price increases.

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As the 2008 financial meltdown moves into our collective rearview mirror, customers are gradually releasing the emergency brake and shifting back into buying mode — and business leaders are breathing an audible sigh of relief.

One after another, surveys reflect small-business plans for increased hiring and decreased price slashing. The rising mood is charted in the February 2011 NFIB Small Business Optimism Index, which shows a gradual uptick in small-business expectations. “This is not a reading that characterizes a strongly rebounding economy,” reports NFIB chief economist Bill Dunkelberg, “but it is the third-best reading since the fourth quarter of 2009 when the economy was expanding rapidly. So it gives us cause for some real optimism.”

Balancing optimism with knowledge of pricing fundamentals

After absorbing several years of declining profit margins, businesses are looking, finally, toward gradual price increases — both to accommodate rising transportation, fuel and commodities costs, and also to reverse multiple quarters of declining profitability.

Some sectors have already made a move. For example, Nation’s Restaurant News reports that 2011 average menu prices in top chains have increased 1.55 percent. Most businesses, though, are moving more slowly, aware that rising consumer confidence exists alongside continued consumer pressure from unemployment and inflation.

With such variables in play, it’s a good time to bone up on long-standing pricing fundamentals, including these four pricing truths:

1. Value matters more than price

Price is what a business gets out of the sale. Value is what the customer takes away. So before announcing new prices, be sure you know and are ready to telegraph the value you offer, including your quality level, your unique benefits, the customer needs you address, and the reliability, convenience and exceptional nature of your business and its offerings.

2. Not all offerings are equally price-sensitive

Price resistance — as well as sensitivity to increases — is lowest when products are considered uniquely valuable, and highest when products are considered commodities that are readily available and easy to substitute. So unless your offering promises high value with a unique point of distinction, move very cautiously with price increases. Remember: The less value customers equate with your offering, the more they’ll resist a higher price.

3. Options make price increases easier to accept

Face it. People don’t like to pay more for what they used to buy for less. If you present price increases as a take-it-or-leave-it proposition, customers may well choose the latter. Instead, give customers choices and control:

- Offer a menu of pricing alternatives. Accompany new prices with such options as bulk prices (“five $50 rounds of golf for $195”), bundled one-price packages (“an eye exam, contact lenses and reading glasses for one easy price”), or daytime or seasonal rates (restaurant happy hours, golf course twilight rates, Tuesday senior shopping day deals).

- Offer products in a range of pricing levels, realizing that when given a choice, most customers willingly opt up to the medium or higher-priced offering.

- Offset increases with new services that dilute the impact of higher prices.

- Offer a la carte services through a self-select menu of features and services (“You choose: $750 includes washer/dryer set along with delivery and installation, or take advantage of our you-haul contractor’s rate of $659”) that allow an increase in prices while retaining the customer’s ability to control expenditures.

4. Price presentation affects acceptance

Especially when raising prices, make the numbers quickly understandable and motivating. Here are a few tips:

- Avoid disclaimers. Rather than saying “$149 — some restrictions apply,” say “$149 any weeknight.”

- Omit commas and cents. “$2,500” looks easier to handle than “$2,994.99.”

- Provide advance notice and a good explanation. Don’t belabor the point, but let customers know why increases are necessary and give them a chance to make purchases before new prices take effect.

Final advice: As you announce new prices, understand and be prepared to define the reason behind increases — but don’t apologize. Keep your focus on the high value you’re delivering, the unique quality you provide and the options available to ease your customers’ purchase decisions.

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