Tuesday, December 05, 2006

Pricing Matters

When you raise your prices, you create an opportunity for customer defections. I'm experiencing that at the moment with my fax to email service, and it's made me think about how you can minimize the risks.

I got an email from the service telling me that my monthly rate was going up by 30%. That's a pretty hefty increase, although the actual dollar amount is low. Here's what's puzzling to me about it: I'm fairly sure that the costs of this service (servers, telecom, bandwidth) are not going up - in fact they have declined over time.

I can keep my old rate by prepaying a year in advance. But because of the size of the price increase, I spent five minutes searching for alternative providers - and discovered that the going rate for this service is now 30% to 60% of what I'm now paying, before the price increase.

Since it's about time to reprint business cards anyway, I'll be changing providers. The thing is, because fax to email is not something I give much thought to, I probably would have happily kept paying the high current price indefinitely.

Here's what my current provider did wrong:

  • They don't seem to understand their market. They sell a commodity service, and their price is high.
  • The email telling me about the price hike didn't tell me what they are doing differently that makes their service worth the extra fee. Since we're talking about the cost of a latte or two a month, it wouldn't have taken much to make me stay with them.
  • They're trying to get me to commit to a year of service,paid in advance, with a stick, not a carrot.
  • They're raising the price too much at once; a series of smaller increases would be much more palatable that what they're doing.
  • To keep my old rate, I have ten days to switch to the prepaid one year plan. That's not enough notice.

Sometimes you need to increase your prices. But if you don't want to lose too many customers along the way, you'd better make sure you explain yourself to them properly.

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