How and when to adjust the prices of your products and services
“A person’s salary increase is a price increase for someone else.”
As an entrepreneur, it is extremely important for you to understand how to adjust the prices of your products and services when the market forces you to do so. Price benchmarking is essential to know where you stand in relation to your competition in terms of pricing. This means that you must compare your price with that of your competition, in light of the benefits that both offer and the value in the eyes of the customer. In this sense, the exercise of calculating your prices involves understanding your market, and the price game involves comparing yourself with that market (understanding that the market includes the rest of the offer, your competitors, but also your customers and distribution channels).
The market, as you know, is dynamic. Changes in the market can lead you to the need to reconsider the prices at which you offer your products and/or services.
When you are forced to make price increases
Today, let's talk about that moment when market changes indicate that you need to adjust your prices. Despite the possible impact on demand, and even though your customers might not like it, there comes a point when your business demands an adjustment.
We will specifically talk about price increases. You can review another resource in this section to understand the implications of the opposite case, price reductions, in the form of offers and promotions.
One of the main reasons driving the need for a price increase is the increase in your costs. When your costs increase, price adjustments are necessary to maintain the profitability of the company and continue providing services and offering products with the quality that your customers are accustomed to.
In this case, the goal of the price increase is not to make more money, but to preserve the profitability of the business and the quality of the product and/or service.
When a business refuses to adjust its prices for fear of losing customers, even though its costs are increasing, it exposes itself to two risks:
Gradually reducing its profits to the point where costs are as high or higher than the price itself, or
Being forced to lower the quality of its products or services to keep costs under control.
The first option inevitably leads to bankruptcy and the disappearance of the business. The second harms the image and can progressively affect customer preference and sales.
For this reason, sometimes price adjustment is inevitable. In fact, it is recommended for the financial health of the company and the maintenance of credibility with customers.
Communicating price increases to your customers
I want to share an example of an email I received from Netflix recently:
The subject line of the email I received from Netflix reads: “We are updating our prices… Here’s why.”
The first line is a title that says: “We are investing in new TV shows and movies.”
And then the text explains how the anticipated increase will allow them to deliver even more value to me for my membership.
Notice that in a simple and direct way, they clarified that if they don’t make this adjustment, they won’t be able to maintain their promise of interesting, varied, and updated entertainment, which is why I subscribed in the first place. They didn’t beat around the bush. They didn’t apologize. They simply kept me informed and reinforced the value that their service holds for me.
Of course, I always have the option to cancel my subscription if I’m unwilling to pay the increase. However, they were facing the same (or greater) risk of losing my subscription if, in order to maintain the price, they started offering outdated or uninteresting shows and movies, with the added risk that their image would lose value.
Rules to follow for price increases
With this example, we have learned some rules that you should follow when you are forced to increase the prices of your products or services:
Always rely on the benefits of your product or service and highlight its value for the customer.
Always be transparent and honest. Do not surprise the customer with unannounced, unexplained, or unjustified increases.
Do not confuse the customer. The more direct and simple your message, the more likely the customer is to understand and accept it.
You can accompany the price increase with some complementary or additional benefit for the customer that does not significantly impact your costs (or that you can easily absorb with the increase).
Avoid abrupt price increases. Sometimes it’s preferable to make a couple of consecutive increases, spaced over time, rather than a very large increase. By being mindful of keeping your prices updated so that you don’t lose profit margin, you ensure that possible increases are gradual. If you avoid them, trying to delay them for too long, it’s likely that when you finally have no choice but to apply them, the amount you need to increase will be too high and significant in the eyes of the customer.
It’s always a good idea to have an alternative plan in place in case your customer refuses to accept the increase, or if it’s really out of their reach and beyond their purchasing power.
In that case, you can have alternative products and/or services in which you reduce or eliminate some benefits in order to maintain the previous prices.
You can negotiate with the customer to identify which benefits are indispensable and which you could sacrifice, so that you can keep costs under control and avoid the increase without affecting the satisfaction of the customer’s need.
How to identify when it’s necessary to adjust your prices?
It may be easy for you to realize when it’s time to adjust your prices. However, I’ll share with you some key indicators to be aware of so that you don’t overlook the red alert:
1- Your costs are growing
This is the most obvious and quick proof. When a supplier increases its prices, you raise salaries for your employees, incorporate new personnel, or face new costs, all of these costs, either directly or indirectly, affect each of your products and/or services.
When you immediately identify that your costs are increasing in some area, it’s time to pay attention to your prices. However, price increases aren’t always obvious. Sometimes they seem small and we underestimate them. Sometimes we don’t even realize it until the month or quarter ends and we see that costs have risen.
2- Even though your sales are growing, your profits are staying the same, or even decreasing
If an increase in your sales doesn’t generate an increase in your profits, something strange is going on. Possibly, costs have been rising gradually, maybe in small amounts, which hasn’t allowed you to notice immediately. Or perhaps you’re incurring a cost you hadn’t considered, and it’s affecting the real calculation of your price.
3- You are growing too fast
When demand grows faster than you can respond, you may need to make adjustments. You may need to review the prices. It’s not imperative, since it may not be a low price causing this condition, but in any case, it’s a sign that should alert you and force you to verify your expenses and prices.
4- Your competitors’prices are higher
It’s very important to continuously monitor the prices of your competitors. Unless your pricing strategy is specifically to stay below the competition, if your competitors increase their prices and you haven’t, what might seem like a competitive advantage at first could be because you’re overlooking a market condition that could harm your profits in the long run if you don’t take it into account. Or it could also affect your image.
Price adjustments are generally driven by inflation or strategic adjustments.
When the adjustment is due to inflation, it’s typically motivated by rising costs, and when they occur, it indicates that our competitors are likely in the same situation.
In the case of strategic price adjustments, they are not always due to a cost increase. They can stem from an internal change in the price strategy defined by the company.
In either case, a price adjustment is a delicate decision that should carefully consider internal elements, costs, image, strategy, market, competition, and customers.
It’s dangerous to make them hastily without considering the consequences, but it’s equally dangerous not to make them in a timely manner, as it could jeopardize the financial health of your business.