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“BUSINESS
INSIGHTS”
to
our Clients, Readers, and Friends
A Price Increase Gone
Badly
Last week Netflix, the video rental company, announced a price increase of up to 60% for new and existing customers. The way it was done seems to have transformed the company from one of the best-loved companies to one of the most hated overnight — at least among thousands of its customers. Angry customers have flooded social networking sites with complaints and negative comments. Their outrage has definitely tarnished the company’s image, its brand and business.
Netflix's reasons for the price increase are obvious. The cost of shipping a DVD can be as much as 75 cents per disk, said analyst Mike Olson of Piper Jaffray and he estimates that it cost just 5 to 10 cents to deliver a movie over the Internet. Netflix is increasing its prices because of solid business reasons - to reflect the cost of its DVD business and to cover growing expenses for its online content - where it believes its future lies.
So what is the real problem here?
What went wrong? Netflix forgot that pricing is a
function of marketing.
Pricing is too often thought of as marketing only after
something like this happens.
Customers could
care less about Netflix shipping costs, license
fees, profits, executive bonuses, shareholder value or
stock prices.
Customers only want to know “What’s in it for me?”
The problem was not the actual price increase.
It was in the
communication about the change.
If
you need to raise prices to compensate for rising costs
or simply to deliver higher revenue and profits,
remember that you don’t have to trade short-term outrage
for the long-term benefits associated with the higher
prices. Here are some basic Rules-of-Thumb when raising
prices:
Talk to your customers and tell them what you are doing and why - so an increase won't be an unexpected surprise. Do it before you announce the price increase. If you don’t you will lose customers just as Neflix has.
Let your customers know how this will benefit them, not you. A customer's perception of your business value often results from the language you or your employees use when you talk about prices. Be up front with your prices whenever a customer asks about them. Don’t apologize for the new prices.
From Selling 101: Price objections are value objections, so are price increases. Unless you add features, capabilities or services it is not obvious how to add value when raising your prices. Make the case that the price increase is about the value the customer is receiving – that it is about ensuring they continue to receive that value.
Consider increasing prices slightly more than you need or want to. This gives you a cushion to lower prices or offer a discount if customers complain - and if they don't, you can hold off on future price increases longer.
This is not everything that you need to do to successfully raise prices, but it is a start. There are a lot of steps to go through in deciding to increase prices and then effectively announcing it. If Netflix management had considered a couple of these. their customers' reactions would have not been as severe. Check online and see the Netflix press release and then their customers' reactions. Watch how the company handles the situation and learn from it.
“We are living in a world that is
no longer facing a shortage of goods, but a shortage of
customers.”
– Philip Kotler
About the Author: Ken Wilson: Strategist, marketing guru, educator, facilitator, author, university lecturer and consultant, he can be reached at ken@wmg-mn.com or 763-476-2216.