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Price increase – now or never?!

Rising inflation and exploding commodity prices make it necessary for many suppliers to increase prices. But, at the same time, we wonder: Can we expect our customers to put up with a price increase? Especially now?

Especially now that the economy is just beginning to recover and price increases in other areas are battering our customers?

The answer can only be: Yes! When, if not now? If we fail to implement price increases now, rising costs will eventually consume our profitability. So how can we implement price increases in the best possible way?

Tip #1: Choose the right starting price that you can get away from

When pricing your offers, you should ensure that you avoid setting yourself at a price point that you can’t get away from later on. For example, while €99 is catchy and below a relevant threshold, exceeding that threshold is all the more difficult later on. 

You should also avoid using the price as part of the product name. The 365-Euro-Ticket offered by the Munich Transport Corporation is a smart idea. However, it is almost impossible to change the price without changing the product. McDonald’s used to have an offer called “1×1”—every product for €1. These included those memorable small French fries. Their increase from €1 to €1.10 has certainly upset many customers.

Poorly remembered prices can be increased better.

Tip #2: Increase prices regularly to train price acceptance

A common argument against price increases is: We just upped our prices, we can’t expect our customers to accept another increase. This assumption is as plausible as it is wrong. Price acceptance is not a tank that can’t run out of gas but a muscle that needs regular training.  The more regularly you train it, the stronger it becomes and the better it can cope with price increases. Conversely: Not increasing for a long time does not pay off in terms of being able to take a bigger leap—it’s quite the opposite!

Regular price increases not only get the customer used to price increases, but also the sales department. Price increases often fail not because the customer does not accept them but because the sales department is reluctant to address and enforce them with the customer.

Tip #3: Better more often than higher for faster margin skimming

Just as you should not overstimulate the price acceptance muscle, you should not overdo it with price adjustments. Otherwise, you risk a sore muscle because customers will resent the price increase. One percent every year is more digestible for customers than five percent every five years. And you lose less margin over the same period.

It’s easier to increase more often than by a higher amount.

Tip #4: Don’t always justify to avoid drawing attention

A good price increase strategy trains and accustoms customers to regular price increases. Ideally, the price is so unnoticeable to customers that price increases are not noticed at all and do not have to be justified.

This is how many newspaper publishers have managed to make regular price increases a matter of course. Justifications (which used to be featured prominently in editorials) are generally counterproductive because they draw the customer’s attention to the price in the first place. Of course, you will need to communicate your price increase appropriately, but you should not expect to gain more acceptance by giving sophisticated reasons.

The less customers know and care about the price, the more likely you will avoid explicit justifications.

Tip #5: If you have to justify your price increases, justify them properly so that you don’t end up on the defensive

Newspaper publishers wanted to justify price increases with the minimum wage. However, this backfired in some cases, as this justification also implies that the publisher had not even paid minimum wages before. Justifications such as “We provide the best service/performance” are hardly convincing because the customer has enjoyed the same service/performance before the price increase.

Raw material prices can work in B2B as an argument, but the customer can, in turn, use it against the distributor when raw material prices are declining. Better is a somewhat concrete argument (“Our suppliers are also raising their prices”) and the indication that in these times, due to the high demand, it is not possible to supply some customers at all.

Generally speaking: It makes sense to use different justifications depending on the price motivation (i.e., GRIPS type) of the customer:

  • Bargain hunters still want to feel they are getting a good deal. For example, if they can upgrade to a bundle option that saves money compared to individual prices.
  • Risk Avoiders want to be treated fairly but are also willing to pay the provider fairly. You can convey to them that all customers and also the provider are equally shouldering the burden of the price increase.  
  • Price Accepters want to be affirmed or know that higher prices justify higher performance or that higher prices mean more performance. With a price increase, they should be offered more options with more performance or service.
  • Routine Buyers want to be valued as loyal customers, e.g., by not paying more than new customers even after the price increase.

Please contact us if you would like to discuss which price increase strategy makes the most sense for your business and how best to implement it! Just send us an email to consulting@vocatus.de or a message via our contact form.

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Vocatus AG Preisstrategie Behavioral Economics
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