Everything You Need to Know About Implementing a Price Increase
When you’ve grown to love a product or a service, learning you need to shell out more money to maintain the status quo can be a bummer.
How the company approaches the price increase, however — from gathering data, to writing the price increase letter to customers, to implementation — makes a huge difference in how customers will interpret the decision.
When your company has decided to raise its prices, there are some clear do’s and don'ts that can ensure you’re putting customers first every step of the way. Here’s our playbook for managing a price rise with the utmost care, including cutting-edge research and examples of both the right and wrong way to communicate the hike in a letter to your customers.
How to raise prices with a spirit of generosity
Although a clear strategy is the backbone of any effective price increase, at the heart of a positive experience for customers is an underlying spirit of generosity.
Business leaders always have to toggle between prioritizing generosity and growth. When it comes to pricing strategy, we recommend leaning into generosity.
Help Scout honors old pricing plans for two years, meaning that current customers don’t see any rate increase until 730 days after raising prices for new customers. Our goal is to make the transition as seamless as possible, particularly for our loyal customers. With the same ethos, we never push upgrades unless they benefit customers directly.
As impactful as raising prices can be for your bottom line, higher short-term revenue at the cost of an even higher customer churn rate is not only ineffective, it’s dangerous. Implementing a price change with a sense of generosity ensures you’re never forfeiting your integrity or the trust of customers.
When you put customers first in every decision, you build goodwill and have more leeway when you need to raise your prices. Patrick Campbell, Co-founder and CEO at Price Intelligently, explains why with the results of their company’s research:
Across the board we found a correlation between a higher customer service rating and willingness to pay. These results may seem intuitive from an e-commerce perspective. Yet, on the SaaS side, they’re of particular interest, because customer service isn’t something we necessarily think about as a top priority in the world of software, at least in the aggregate.
Patrick Campbell
That finding doesn’t surprise us, though. Customer service has always been about maximizing value. When you demonstrate your worth in every interaction, you gain more leverage to implement a price rise that’s mutually beneficial.
Dedicate significant resources to testing price changes
Given the intricacies of a successful pricing strategy, there’s a temptation to “wing it” and see what happens. Don’t fall for it. A price change should never be in reaction to a competitor, a customer, or even a big shift in the market.
Instead, the best companies focus on building out a pricing infrastructure, or the mechanisms that help you analyze potential pricing strategies and gauge their performance over time. According to McKinsey & Company, businesses that fail to build this infrastructure fall into one of two traps: They underestimate the power of intelligent pricing, or they choose not to invest in a critical price-testing model.
Unlike a lot of other product investments, developing a rigorous, data-based pricing strategy has a quantifiable ROI. The same article from McKinsey suggests that strategically increasing a price by 2-4% could increase profits by 15-25%. No matter your business, knowing how to increase prices at your company hinges on a deep understanding of your product and its ever-changing value in a dynamic market.
The pricing process also requires deliberate, continuous testing over time. Given that, don’t refer to a price as everlasting or “forever” (something we learned the hard way!) or offer lifetime guarantees. Customers envision a lifetime as their lifetime, not the lifetime of the product.
The 3 keys of price testing
McKinsey hints at three keys to help pinpoint how to increase your prices. At Help Scout, we’ve taken a similar approach. By planning ahead, you radically increase the likelihood of a positive outcome for everyone, including your customers.
1. A clear structure
Our intention is always to strike a balance between maximizing the value we bring to customers and sustaining the company’s momentum. These two drivers are not necessarily mutually exclusive, but the right pricing structure requires a complex, ever-changing calculation that’s derived from constant analysis of the two.
2. Underlying analytics
At any given time, a team of up to three Help Scout engineers is assessing pricing and packaging options with the above balance in mind. During the testing stage, our team focuses on two clear but often contrasting indicators: price sensitivity data from A/B tests and the data that underpins our intention to deliver the strongest price-performance ratio in the market.
3. Thoroughness
It’s not uncommon to run more than 10 A/B tests to identify the right packaging and pricing mix for customers. No fewer than a dozen people on all sides of the company contribute to the change from the initial analysis through to customer communication. We take everything about the process seriously, and that’s the way it should be.
How to write a great price increase letter
Some companies follow all of the above advice, then drop the ball instead of running it across the finish line. If you’ve ever been taken aback by a sudden price hike, you know what I mean. It doesn’t matter how much thought a company puts into a price increase if they can’t communicate with empathy and transparency, and way in advance.
Research shows customers perceive a price rise as fairer when the company communicates the change directly. The breadth of the explanation needs to match the significance of the price increase — i.e., a small price increase requires limited clarification, but a big increase requires a lot of detail.
We’ve learned to be painstakingly deliberate about every aspect of the communication around price changes. Our team starts by sending a price increase letter to customers via email and in-app notifications six months in advance. We strive for transparency and empathy, giving customers all the information they need to make an informed decision.
Price increase announcement examples
Here’s a look at two examples of letters to customers about a price increase from totally different organizations and contexts.
Example 1:
Dear Elizabeth,
We're writing to let you know about a pricing update that affects your account.
Starting July 1, 2018, your subscription price will be $60 per month, plus tax where applicable. This increase will take effect on your next billing date on or after July 1, 2018.
We're constantly introducing new features and improvements to QuickBooks. You can always visit our blog for the latest updates but here are a few highlights:
Automatic Sales Tax: Get custom rates automatically added to invoices based on location
Contractor Self-Setup and E-filing: Easily gather contractor information and efile 1099 forms
Projects: Stay organized and track profitability project by project
Progress Invoicing: Get paid faster by invoicing in installments across the lifetime of a project
Desktop App: Faster access to QuickBooks Online via your desktop
For more on the pricing changes, visit our FAQ page. Other questions? Give us a call at 844.832.2902. We're happy to help.
— Your QuickBooks Team
What QuickBooks did wrong in this price increase letter to their customers:
Less than one month’s notice for the price hike
No “thank-you” for being a loyal customer
Impersonal, robotic tone
No explanation of the reason behind the change
No context for how often a price rise takes place
No indication of the percentage of the price increase
A generic signoff with no accountability from a leader at the company
Just one email notification; no follow-ups
No explanation of the customer’s options
Example 2:
Dear Members,
I'm writing to inform you of a 5% increase to the cost of membership, which will take effect as each membership comes up for renewal, beginning on February 1, 2017. This modest adjustment — our first since 2010 — equates to an additional $10 per year for Young Patrons, $11 per year for Young Patron Family Members, $15 per year for Individual Members, and $16 per year for Life Members, Family Members, and Proprietors.
By restricting the amount of the increase — and by *continuing to subsidize more than 80% of the costs of membership* — we seek to keep the Athenæum affordable. Even after the scheduled adjustment, a year of access to everything the Athenæum has to offer will cost less than such "optional necessities" as high speed internet access, gym memberships, and newspaper subscriptions.
The circumstances prompting this change are compelling. Simply put, our costs are growing at a rate poised to outpace our income. (To read an overview of the Athenæum's financial position, click HERE.) In order to provide the services, spaces, and collections that our members rely on, and so that we may continue to evolve and excel, we must take meaningful steps to grow our revenue. To that end, we are launching a multipronged effort to increase our sources of support. The membership rate adjustment is only one of several such initiatives. Others include:
Redoubling our fundraising efforts. Currently, many members do not contribute to the Annual Fund, perhaps because we have failed to explain the essential role that such contributions play in underwriting nearly one quarter of our activities. By communicating more clearly the value of every gift — in all amounts — we hope to double participation in the year ahead.
Raising the price of Proprietors' shares to a rate more consistent with their historical values.- Increasing, ever so gently, the number of corporate event rentals.
Instituting (by mid-2017) an admission fee for visitors from the general public. (Of course, our members' guests and affiliates of sister organizations and of the museums in our reciprocal admission network will continue to visit free of charge.)
Piloting an hourly fee-for-research service intended to assist scholars unable to travel to Boston to consult rare materials.
We will monitor each of these initiatives closely — so that we may refine and pursue those that prove to be successful, and discontinue those that are not.
All of us at the Athenæum feel grateful to be able to rely on your support. By coming together at this critical juncture, our community of curious, open-minded thinkers will continue to pursue knowledge — as we find it written on the page and displayed on the walls, onscreen, and face-to-face — here, in this oasis for reflection at the heart of our bustling city.
Sincerely yours, Elizabeth E. Barker, Ph.D. Stanford Calderwood Director
What the Boston Athenæum did well in this price increase letter to their customers:
Gave more than a month’s notice until a new annual membership fee kicked in
Included the percentage of the increase, as well as the actual amount of the price change
Added the context that this is the first price increase in seven years
Gave a clear description of the “why” behind the change
Detailed descriptions of the organization’s other efforts to keep prices down
Used language that honors the community with positive descriptions of its members
Gave a clear, heartfelt thank-you for contributions
Used a warm, consistent tone that speaks directly to members as humans
Ended with a personal signoff from the organization’s executive
Reading these two contrasting price increase letters, you can feel the difference in the effect they would have on a reader. The missing pieces in the QuickBooks letter add up to the sense that the company cares less about its customers and more about its revenue. The detail and tone of the Boston Athenæum letter add up to a sense of gratitude for their transparency.
When you craft your own price increase announcement to customers, communicate with honesty, humility and appreciation, which pays major dividends.
Every day, businesses put enormous effort into gaining the trust of customers. You don’t want to throw it all away with a 2% price hike. Approach raising prices with the highest level of attention and expertise that your company can afford. With a clear focus and dedication to digging into the details, you’ll be able to optimize a strategic price rise without risking the customer relationships at the center of your success.