Owner, SATOV Consultants Inc
Nothing puts fear into the heart of a sales person, or a CEO for that matter, than the thought of changing prices. Input costs tend to rise over time, strategies change, competitors move: all are scenarios where a price change is applicable. But when we work with clients on pricing we meet more trepidation than we do with many other analytical pursuits. “We just moved prices 8 months ago”, or “our biggest competitors are aggressively looking to steal share”, or “consumers complain now about pricing”. We would love to tell our clients they are wrong “just look at the data…you have room to move by 10% and not lose volume.” But we can’t. Altering prices is an area where we feel our clients should proceed with caution. More often than not they should indeed proceed, but they should use an approach that includes quantitative data alongside several other types of data, including sales intuition and a solid test.
Recently we saw RBC change rates on some of their services. Then they changed back after some consumer backlash. Changing prices in a tight market controlled by a few players is something we can all learn from. It takes courage, especially when the prices are moving up rather than down. When BMO led the market with the first 2.99% mortgage a few years back, that was likely an easy decision compared to RBC raising rates; once they got comfortable with the reduced profitability on every mortgage they wrote, they only had upside to gain by increasing share. For RBC, they needed to be sure that these service fees weren’t drivers of churn; if they were, who could steal share? How much? We saw them pull the price changes back: was that the right reaction? My quick view is that the changes must not have had a solid foundation if they were so ready to change them back. Any pricing change strategy includes predicted backlash and ways to handle the objections. It is important to separate between customer complaints about price changes (inevitable) and a change in customer behavior as a result (less clear in this case).
So how can companies go about price change in safe and systematic way?
First of all, hire a consultant who does a lot of pricing work. I know, you are shocked to hear me advise hiring a consultant. The truth is that pricing research is complex and specialized and many companies don’t retain that type of expertise in house. Consultants can also lend an objective voice to facilitate discussion around what can be a challenging risk for many. Large organizations like FI’s and Telco’s have internal pricing departments. They can fit the bill provided they have experience with the specific pricing challenge, enough objectivity and access to the latest research methods.
If you don’t hire a consultant, do some primary research. Consider the best type of research for the type of problem you are trying to solve. Spend a lot of time writing the questions that get the consumers in the right mindset to replicate reality. One trick with pricing research is to ensure that the questions include backward looking scenarios. Consumers will often exaggerate their reaction to a prospective price change “If they move their price I am moving my business”, (which by the way is often why sales people think that). Ask them to think back to the last time a similar provider moved a price and how they reacted. And ask them why.
If you don’t want to hire a consultant or do any research, please do a test of some sorts. Control pricing tests are harder to do in today’s online world, but there are ways still to segment populations by geography, time bound offers, change prices on a subset of items. Be sure to predict the backlash and agree beforehand what makes the test a pass or a fail. Social media vitriol can make you change your mind if you have data that shows that it is predictive of behaviour or brand health. If you are aiming for share gain with a lower price, how much makes it worthwhile?
You can’t completely avoid the stress and uncertainty of price changes, but you can reduce the drama with a structured, fact based and objective process.