When should you increase your prices?

Posted by Moira McCormick on October 14, 2015
Moira McCormick
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Well, don't follow the example of the head of a US pharmaceutical company who got the whole price increase issue so very wrong recently. His company, Turing Pharmaceuticals acquired the rights to Daraprim in August; they then proceeded to raise the price of this 62-year-old medication used by Aids patients and those with a compromised immune system by a staggering 5,000%. A dose of the drug increased overnight from $13.50 to $750.

CEO Martin Shkreli said that the company would use the money it made from sales to research new treatments. The pill costs about $1 to produce, but Mr Shkreli said that does not include other costs like marketing and distribution, which have increased dramatically in recent years. After riding a storm of protest, Turing bowed to international pressure and announced it would lower the price of the drug. Lesson learned!!

 

Try Price Testing

One way to assess the optimum time to increase your prices is to carry out price testing. You need to know as accurately as possible which pricing strategy will generate the most revenue – either a lower price that drives more traffic and buyers or a higher price that may attract fewer buyers, but delivers more income per sale. Here are some points to consider before raising prices:

  1. Unless you are selling a commodity or a product that competes in a market ruled by rock-bottom prices, there is always some flexibility in your pricing.
  2. Finding the best price for a product or service can be tricky. A prospect's perception of your product or service will play a part in determining their own opinion of the 'right price'. However, the price itself can also have an impact on how the product or service is perceived, thus creating a loop. Within this loop, you have to find the price point that brings you the highest revenues.
  3. A very small difference in pricing can have a huge impact on your revenue. This is particularly true if you sell high volumes, or on a rolling basis.

Here is an example of some price testing carried out over three days recently on the sale of an academic book. The three price points tested were a)£7.99, b)£14.00 and c)£24.99.

Which price point was best? Which price point yielded the most revenue?

The number of orders for the book and the revenue generated at each price level were measured. Based on the number of orders, it appears that the £7.99 price point was perceived as a lesser value product and that the £24.99 price point was too high. The £14.00 price point generated significantly more orders but because of the larger price point, the £24.99 price actually generated the most revenue.

One important additional point was that the higher price on the same book created a much higher profit margin, which resulted in greater profit generated on less physical units sold. For physical products, profit margin and marketing costs should always be taken into account.

You also need to weigh the benefits of additional new customers against that of higher revenue. In the example above, the new customers at the £14.00 price point may actually be worth more in the long run than the additional immediate revenue generated at the £24.99 price. In other words, the additional revenue made in subsequent sales to these customers may more than make up for slightly less revenue on the first sale.

It may be to your greatest advantage to select a price that generates slightly less revenue if that price also generates significantly more new customers. The average lifetime value of your customers and your ability to make additional sales to them will be the determining factors here.

 

While testing your pricing, keep the following key guidelines in mind:

1. If you are selling a physical product, you will need to know what your competitors are charging for the same or a similar product, and get a feel for whatever "added value" a prospect might perceive when buying from you instead of someone else. Is your brand/reputation stronger? Do people trust you more? Is your service superior? Do you provide services or add-ons along with the product? Do you offer better deals on shipping or warranties? All these elements can influence the perceived value of your products – and a customer's willingness to pay more.

For retail products, one excellent way to see what your competitors are charging is to go to a price comparison site like http://www.kelkoo.co.uk.

2. If you are selling a service, it can be harder to make such a clear comparison with competitors. The perceived value of your service will depend on many factors. In the case of a service or "soft good," you should test a much wider range of price points.

3. For a product or service one key goal is to find the price that is "too high." In other words, keep raising the price until the results clearly show you are charging too much. Then slowly back down from there until you find the highest price the market will bear, giving you the highest revenue on sales. However, remember that this highest effective price point, which will have the highest profit margin, may not necessarily be the best way to generate the greatest amount of new customers, as has been noted above.

4. It might be a good idea to 'phase in' a price hike. Let customers know prices are going up next month, or next quarter. Give clients a chance to buy in volume ahead of time to save money. Sooner or later, customers still end up paying the new price.

5. Offer one price for your loyal frequent shoppers, and a higher one for occasional or new users. This means you don't alienate your loyal customers.

6. Give your customers an option. For example, they can pay the new higher price or they can opt for a product at a lower price. By offering them an alternative, they will feel more in control.

7. You can re-vamp, re-package or add new features to your products to 'add value' - and hence command a higher price.

8. Review competitors' pricing to see whether some of your products are priced unnecessarily low. Small, strategic increases on a few popular items can add up quickly, while customers may barely notice the difference.

9. Remember, honesty is the best policy. People appreciate it when you are straightforward and take the time to explain to them when, why and how you are raising prices. Ultimately, these are the key questions on customers’ minds when prices go up. If you are proactive and honest about it, the customers won’t complain.

10. Once you have found your optimum price point, try testing it again a few months later. Markets keep changing, and today's best price may not be the best price six months from now.

 

Conclusion

When evaluating your offer price, intuition often fails to deliver the ideal results. Testing is the only way to determine which approach will produce the most profit: a lower price that drives more traffic and buyers, or a higher price that may attract fewer buyers but deliver more income per sale. Every business is unique, and the above testing guidelines will help you determine your own ideal pricing structure.

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Liked this article? Then 7 Steps to the Right Price is worth a read too!


 

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