The Good, The Okay, and The Ugly of Increasing Your Prices

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A common fear among business owners is raising rates for their services. Whether you're below market price for your industry, need cash flow to increase your offerings, or have encountered increased costs of your own, raising prices is something you are going to have to do at some point. But you don’t want to lose clients. How can you make sure that raising rates won't damage your business? When you decide to make the leap, there's a wrong way to do it and a right way. Let's look at Netflix as an example:

In 2011, Netflix was still mailing DVDs in addition to their streaming service. That year they made a sudden announcement that they were going to raise rates for streaming, as well as charge a separate fee for the DVD service. It was a public relations nightmare resulting in millions of lost subscribers in only a few months. The price hike was rolled back.

Fast forward to 2014. Netflix rolled out a $1 price increase to $8.99 per month. Current subscribers were grandfathered into the old rate of $7.99 for two years. By the end of 2015, Netflix had tripled their 2012 subscriber list to 57 million.

In 2016, Netflix announced another change in subscriber rates, including for those long-time subscribers still paying $7.99 per month. The rate increase was phased in slowly and offered new plans including a low-priced Basic Plan and an $11.99 Premium Plan. They also added about 600 hours of new and original content. There's now over 90 million Netflix subscribers.

Netflix learned from their mistakes and we can too. The three ways Netflix raised their prices can be best described as The Good, The Okay, and The Ugly.

The Ugly - In 2011 Netflix made a couple huge mistakes. The first is that they didn't honor their contracts which had no expiration or renewal term, so their customers could reasonably expect that their pricing would stay the same. The best time to raise the price is when it is time for a renewal or have a contract clause warning of periodic “cost of living” price increases. The other mistake Netflix made was failing to warn their customers about the price hike or offer an explanation leaving customers to come up with their own rationale like Netflix was just trying to pad their bottom line. Netflix CEO Reed Hastings said, "We compounded the problem with our lack of explanation about the rising cost of the expansion of streaming content ... [so] many perceived us as greedy." While you don't have to go into specifics about your costs and profit margin ratio, it is a good idea to give some explanation. The explanation can be as simple as keeping up with the market.

The Okay - In 2014 Netflix came back for a second try. This time, Netflix recognized their long-time customers and offered a 2-year loyalty discount giving them 2 years to get used to the idea of paying more. Raising rates for incoming customers is a great way to test the price-tolerance for your market. Once you evaluate the market’s response and are comfortable with the traffic coming in with the increased your price, you can then make the change for your existing clientele.

The Good (or even Great) - In 2016, Netflix coupled their increase with added value for their customers with significant additional content. Netflix also added multiple price points. New packages were introduced, with one package the same price customers were already paying. Price conscious consumers could keep their old rate but received less value. The lower rate limited viewers to just one device at a time. Customers who recognized the value of a better viewing experience and more content kept or upgraded their plans for the higher cost. Following the hike, Hastings reported to his shareholders that “Our forecast for the quarter was low... because we underestimated the positive acquisition impact of our major original content debuts.” With the right strategies in place in 2016, the company had the confidence to raise their rates. Knowing that consumers would recognize the value the company offered, they offered multiple plans, and made up for any lost customers in increased revenue.

Losing clients is never easy, and no one wants a relationship to end because of a price increase. However, my experience is that if you do good work and you respect your customers’ concerns, the only customers you will lose are the ones who would have left anyway at some point for someone else’s discount. And those aren’t your best customers. The customers who are the most price-sensitive often require the most maintenance.

You must have confidence in what you're providing to your clients and you must provide value. If both of those factors are present, your clients will understand if you need to increase prices. They will want you to succeed because they want to continue to continue receiving the benefits of your products/services. You won’t do any good for them if you can’t stay in business. And the first rule of staying in business is you must make money.

If you are still fearful or unsure about whether a price raise would be good for your business, call us to set up a free consultation. We'll help you chose the right time, form the communication, and have the confidence to increase your price for your valued clients.