Do higher prices drive customers away?

Jan. 24, 2012 | by Dale Furtwengler

Higher prices = lost customers. That's a common belief among business owners. Is it true?

That isn't the case for Ron Ameln, the owner and publisher of St. Louis Small Business Monthly. Here's what he said. "I told my advisory board that I wanted to raise prices. They told me that I was in a dying industry and raising prices would only accelerate my company's demise. I raised my prices 5 percent and revenues grew by 8 percent."

Jay King, the CEO of Simploy, "the best PEO in the Midwest," said "After hearing Dale speak and reading his book, Pricing for Profit, I began to price our services for new contracts based on value, not on our competition. I was pleasantly surprised to find that our revenues grew even faster than the price increase. Having the confidence to say 'No' to people who want lower prices makes running my business a lot more fun."

In both these instances the customer base grew as prices went up. Are these anomalies? The short answer is "No." My experience has been that business owners who raise prices to levels that more accurately reflect the value they provide grow their customer base as well. Why?

Because their value claims become more credible. Instinctively buyers understand that higher value requires higher pricing. During a recent speech a woman in the audience said "You're right! My 13 year old daughter is saving her money to buy a used iPad. In anticipation of that day and to see how close she is to having the money she needs she's been searching the internet. The other day she saw a really low price and said 'No point in checking into that one, there's got to be something wrong with it.'"

At age 13 she'd already developed that instinctive knowledge that real value commands a premium price. You don't have to trust me on this; you know from personal experience that you become skeptical if the price doesn't reflect the value claims.

Armed with this knowledge it would seem that every business could raise prices and have the same experience, yet you and I have heard plenty of horror stories about companies raising prices and losing customers. Why does this happen?

If a company raises prices and loses customers there are several possible explanations. It failed to:

  • Quantify and communicate its value effectively.
  • Qualify the prospect before accepting them as a customer.
  • Provide the value that customers want.

Let's explore each of these in more detail.

Communicate Value

Many business owners/leaders have never been taught how to quantify value; consequently they have a difficult time communicating that value. The problem is compounded by the fact that buyers need this information to make an informed decision. Indeed, they're no more adept at quantifying value than the sellers. When neither party, buyer or seller, can quantify value, it's easy to see why raising prices would result in lost customers. There's no justification for the increase in either party's mind.

Qualify Prospects

There isn't a business out there that hasn't either failed to profile its ideal customer or lost sight of that profile and taken on business they should never have accepted. It's part of our humanity - we make mistakes.

Customers who don't fit our profile see little, if any, value in what we have to offer. That's why we have to discount to get their business in the first place. For clarification, "discount" refers to any concession made to the buyer to get their business - not just price reductions. Concessions given have costs associated with them which means, in essence, that you've reduced your price.

These "discount" customers will go away when you raise prices, but that's a good thing. They're the ones who've been gobbling up huge quantities of your organization's time and energy as well as costing you tons of money. They need to go away so that you can devote your organization's capacity to those willing to pay premium prices.

Provide Desired Value

All too often business owners/leaders continue to "improve" their offerings to gain a competitive advantage only to discover later that their customers don't really value those improvements. The solution is simple: talk to your customers before you make the improvements to ascertain that they're willing to pay for the improvement. If they are, you'll not only have a reason to raise prices, you'll have a new marketing tool to attract like-minded customers to the fold.

The moral of the story is that you can, indeed, raise prices and increase your customer base. The key is to avoid the three mistakes mentioned above. Do that and you, like Ron Ameln and Jay King, will smile all the way to the bank. Happy selling!

Topics: Consumer Behavior , Marketing

Dale Furtwengler / Dale Furtwengler is a professional speaker, author and business consultant. His latest book, "Pricing for Profit," is dedicated to helping organizations break the bonds of industry pricing.
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