Raising Prices in a Bad Economy

When currency exchange rates go down, small businesses often make mistakes in setting prices, which can lead to serious problems. This article contains practical advice on what to do in such a situation. We must think of inflation as an economic condition that will persist for some time and, most likely, get worse. Thus, trying to “wait it out” is a bad strategy.

An initial and common mistake is holding off until the last minute and then jacking up prices. This will only shock your customers and result in dropped income. The reason is the devastation of consumer consent about price level. Once you serve a customer for some time with a certain price level, they get used to it and that creates an agreed-upon reality. As L. Ron Hubbard has written, “Reality is fundamentally agreement. What we agree to be real is real.”1 A consumer’s expectations on prices supported by his experience are the reality. If prices jump, it breaks the reality, and the affinity and communication go down. Mr. Hubbard states, “Without reality, there is no affinity or communication.”2 When this happens, the consumer will then look for an alternative among your competition, postpone the purchase, or decide against it completely. The “shock” will also damage the relationship with your clients, which will not be easy to recover.

Loyal customers and your relationship with them is a valuable asset for the company; and especially in a temperamental economic atmosphere, you should take care to preserve it. The following tips will help get your customers to accept the inevitable increase in price.

Downsizing

If it’s possible to reduce the cost by changing an aspect of the product or service without compromising and still meeting the client’s needs, you should do that first. Figure out how to cut down costs without increasing the price. This can usually be done with both products and services. You can reduce size, weight, the number of included services, etc. When people start saving money, they are prepared to make some sacrifices if that does not fundamentally interfere with the benefits they expect from the purchase.

Specials

The idea here is that you calculate a reasonable price for your product that would allow you to maintain profitability. To make a gradual shift to the new price, you run a special with an X percent discount for a certain period of time. Calculate the discount so that the product remains competitive. This promotion ends and the next one, with a smaller discount, starts. The cycle continues until you reach the new intended price. This allows customers to ease into the new price level while you smoothly adjust your prices to meet current market demands.

Packages

The company incurs certain operating costs to sell several units of a product or service. Such costs don’t really depend on the quantity. Whether a person buys three tables or one table, the operating costs are almost the same: the work of sales assistants, movers, shipping costs, and so on. You could calculate your operating expenses per purchase of one product unit/service, and based on that, offer package deals. When a buyer purchases only one service, they get a new higher price; but if they buy a service or product bundle, the unit price stays close to its usual range. At the same time, you promote the package prices, thus demonstrating that the per-unit price has not increased. This will also allow your clients to gradually familiarize themselves with the new price level while maintaining profitability.

Updating Your Product Line

In an economic and market change, consumers’ tastes and needs will also shift. It is a good idea to update your product line to reflect changes in your clients’ preferences. When your clients start making less money, they become picky regarding the product and its characteristics. Customers are less likely to follow old habits and will use reason rather than emotion to discern product qualities. They will pay higher attention to the price/benefits ratio. While before they would buy the same goods and services without a second thought, now they’ll take a second or two to reevaluate their preferences.

It’s during this time that you should bring to their attention the inexpensive alternatives to the usual products or services. But of course, you would need to update your product/service line accordingly.

Ideally, you should use several simultaneous approaches to raising prices, as any changes in pricing require changes in advertising, merchandising and sales techniques. It makes much more sense to raise prices gradually, rather than suddenly shocking your customers just to meet your bottom line.

A business owner will always be faced with a changing and challenging economy; so knowing how to regulate prices without shocking your client base will ensure that you’ll not only survive market changes but thrive.

oOo

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References:

  1. Hubbard College of Administration Reference Volume II, page 11.
  2. Hubbard College of Administration Reference Volume II, page 7.

Alexander Visotsky is a celebrated author of business management books and the CEO of Visotsky Consulting, a successful WISE-licensed consulting firm in the Ukraine. As tough as his native Siberia, Visotsky is making a significant cultural impact in Russia, Ukraine and the US through the implementation of the Hubbard Administrative Technology.