Price Increase ➠ Surprising Revenue Growth

It may surprise you to learn that revenue growth usually exceeds the price increase.

The publisher of a monthly business publication told me that, shortly after having read Pricing For Profit, he informed his Board that he intended to raise prices. The Board told him that he was in a dying industry and that a price increase would accelerate his publication’s demise.He told me that he ignored their advice, raised his price 5%, and his revenues had grown 8%…a 60% improvement in revenues above his price increase.

In 2011, after the worst recession in seven decades, Kraft Foods raised their prices by 7% and experienced an 11.4% increase in revenues…another 60% gain over the price increase.

Many business owners find these results surprising; they expect price increases to result in lost customers with an attendant decline in revenues. This dichotomy begs the question “ What are business owners overlooking when they assume lost customers and  declining sales?”

Overlooked

They are overlooking several things including:

1. The potential gain in customers who previously questioned the quality of the company’s offerings because the price was so low.
2. The price increase from retained customers exceeds the revenues from lost customers.
3. Customer loyalty is higher than they imagine.

Let’s explore each of these in greater detail.

Customers gained

Often businesses are missing out on their ideal customers because their pricing doesn’t reflect the value they provide. At an early age, we learn the relationship between value and price. Here is an example to illustrate this point; it occurred during one of my pricing presentations.

A woman in the audience said that her 10-year-old daughter was saving to buy a used iPad. She said that periodically her daughter would go online to see what was available and to gauge  how close she was to affording an iPad.

During one of her searches, the daughter said “There’s no point in looking at that one.” When her mother asked why, the daughter responded “The price is too low. There must be something wrong with it.” At age 10, the daughter had already learned the relationship between price and value.

Unfortunately, this lesson gets lost when we become business owners. New business owners often feel that they have to prove the value of their offerings before they can ask premium price for it; consequently, they employ a low-price strategy.

The reality is that their low price overrides their claims of a superior offering which keeps value-oriented buyers at bay. It’s only when the price is congruent with the value provided by the offering that value-oriented buyers feel comfortable purchasing an offering.

In essence, low prices are preventing people who value what you offer from becoming your customers because your price isn’t congruent with your claims of a superior offering. When your pricing and your value are congruent, you gain customers who will pay a premium for what you offer…in good times and bad.

Retained customers

Generally, the customers you’re going to lose when you raise prices are your most price-conscious customers. They also happen to be the least loyal, most difficult customers you have. Losing them often saves you a great deal of money because you and your staff are no longer wasting time with people who’ll never be happy.

More often than not, the price increase alone will more than offset the revenue lost from these PPP [persistent posterior pain] customers. Add to that the cost savings you’ll experience when these customers are no longer wasting significant amounts of your and your staff’s time.

Unexpected customer loyalty

Customers are more loyal than you realize…especially when they’re happy with the results they’re getting. Their loyalty is a powerful indicator that you’re exceeding their expectations.

Couple that with the fact that changing vendors is both time consuming and risky for your customers and you can see why customer loyalty is greater than you’ve anticipated.

Takeaways

When viewed from these three perspectives, it shouldn’t be surprising that revenues grow faster than price increases.

What may be surprising is that the growth in revenues is often 60% higher than the price increase. What a comforting thought that is.

Stop thinking about the customers you might lose, they’re typically the ones you’d be better off without. Instead, think about the customers you’ll gain…customers you’ll enjoy working with and who are willing to pay a premium for the value you provide in good times and bad.

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If you’d like the leaders in your organization to learn how to use the numbers more effectively and dramatically improve the productivity of your workforce, contact me to learn more about these resources:

Resources

Making the EXCEPTIONAL Normal program helps you identify and nurture emerging leaders who elevate all around them to higher levels of performance and greater job enjoyment.

Financial Awareness & Strategy program where employees learn to identify opportunities to improve financial results and prioritize these opportunities on the basis of which produces the greatest impact with the least effort. Greater financial awareness = Better decisions.