TLDR: Raising prices is an angst-inducing ritual for all companies. The art of raising prices involves a clear yet sensitive dialogue with customers to justify the lift.
Even with an expanding economy and rising input costs, raising the prices that a business’s customers are charged is never easy. Indeed, the last thing a company wants to do is increase what it charges customers by too much so that it turns some away toward cheaper alternatives, just as growth was starting to pick up. However, rising prices are often times not an avoidable option for business owners but what is in their control is how customers are informed of such increases. The large online retailer Amazon recently experienced such a situation when in increased the price of its popular Prime service by more than 25 percent from $79 to $99. Amazon used a variety of techniques to manage the introduction of the new prices which all companies could learn from. For example, Amazon partially blamed cost increases which consumers can often find understandable as long as they are convinced that the input inflation is genuine and not simply made up. Another tactic Amazon used was to float rumors or simply provide guidance about even larger price increases beforehand. This can help a business test the waters of a proposed price increase and customers may actually feel better in comparison when they see that they are being charged “only” 25 percent more when they were previously expecting a 50 percent increase. The Harvard Business Reviews expands:
- Appeal to Fairness. Consumers are receptive to a price hike if they perceive it as fair. Amazon clearly noted that it has not raised Prime’s price since its inception nine years ago. C’mon, nine years is a long time!
- Hint That There’s More to Come. Rumors have been swirling that Amazon will be adding an additional feature to its Prime package – streaming radio. More features translate into a better deal for customers.
While Amazon did a good job of raising prices, let’s call it a B+, there is more it should have done:
- Remind Customers of the Value It Provides. At $99 (or even $119) a year, Prime is a great value. From a streaming-only perspective, Netflix charges $96 annually (with admittedly a more comprehensive selection). The once-a-month Kindle lending library ostensibly saves Prime members, say, $9.99 a month, from otherwise purchasing e-books ($120 annually). Finally, two-day shipping is a big time- and money-saving service. How convenient is it to click to purchase a $5 pair of scissors instead of incurring the time and gas expense of visiting a local Target? Saving 15 – 20 minutes here-and-there in all of our busy schedules is meaningful, hence valuable. Even if members don’t currently use all of these services, this value-reminder may encourage them to do so – which deepens loyalty.
- Resist the One Price Fits All Mindset. As I have previously argued, to effectively grow a business, one price does not fit all. Offering consumers a range of good-better-best options truly enables companies to profit and grow. Price sensitive customers purchase the good option while consumers who highly value a product spring for the best. Since Prime is so critical to growth, it needs a lower price point entry version to attract new customers. Amazon should have tiered its Prime program.
