How to do painless price increases

This week, we republish this column and a series on pricing which first came out last February 2004 when the peso was reeling from a series of devaluations (and was forecasted to reach P65=US$1 at one point) and even this paper had to increase its cover price by P3.00. So here it is again and we hope this helps you in the midst of pressure to increase your prices.

An eternal question that will haunt Filipino marketers faced with consumers dealing with rising prices of rice, gas and everything else in between (except for the domestic airlines who are still dishing out almost everyday low airfares) is this: how do I increase the selling price of my products without losing my customers?

Many times, marketers or the finance guys in the office will determine the price increase by simply adding on the increase in cost. Many will hold off and absorb the cost of a more expensive dollar (assuming a significant portion of your product or service—if for example you have to remit royalties on services in dollars—is imported) or raw materials (prices of steel doubling the past year will surely pressure those in the construction business; price of wheat doubling as well has put pressure on the likes of those manufacturing instant noodles) by trying to be more cost efficient.

We say there's a better way.

Asking the right question.

The best way to go about a price increase is to ask the consumer--your customer--the question: at what price are you NOT willing to buy this product anymore? Basically, when you do your market research, you never ask them what price they are willing to pay. You'll get baloney answers. They'll say, "Siguro iyong mura." People don't know what they want. But they do know what they DON'T WANT. Case in point. Just ask your spouse or date, "Honey where do you want to eat?" He or she will say, "I don't know. Ikaw?" As soon as you make some suggestions like, "Okay, how about Kermit's" You'll get a reaction like, "Ay! I don't like. We just had adobong frog's legs the other night." Then you suggest a few more restaurants and the two of you will basically arrive at a decision by process of elimination.

It's the same thing with pricing your products. Let your customer's tell you at what price they are n-o-t willing to pay anymore for your product or service. There is an organized, scientific way of doing this. Most professional research agencies now know how to do this. (The senior MRx pioneered and revolutionized this kind of price research and taught most of the research agencies how to use it.) If you're an entrepreneur, you can still do this kind of research, do-it-yourself-style.

All you have to do is show your product or a description of your product and produce a chart displaying the current price of your product/s or service/s. Then show a series of prices that are higher than the current price. Then ask the question. "Okay, here's the price of the product that you are currently buying. At what price will you begin to substitute, replace or stop buying this product?" Then you show the prices in increasing scale. Take note of their answers. If you have a small trading business with 20 or 30 customers, then you can do a census and ask all of your customers. If you have 20,000 customers, then ask your friendly neighborhood research agency to survey a correct sampling of your customer base.

Surprise!

At the end of the day, you'll have data that might surprise you. You may even find out that a good majority of your customers are so loyal to your product that they would tolerate a price increase much higher than what you were thinking of. A couple of clients of ours actually discovered this. For example. At what price would you, dear reader, stop buying this newspaper? At P20? How about P22? How about P25? How about P27? (Hey, it would be cool if you could let us know. Text us your answer at 0920-9519618. Text "A" for P20, "B" for P22, "C" for P25, "D" for P26, "E" for P27.)

Of course, greed and taking advantage of your customers' loyalty is another matter. But wouldn't you rather have that data, that intimate knowledge of what the consumer is thinking, and base your price increase decision on that? (Versus making a decision based on a bunch of marketing and finance executives hunches and assumptions.)

"Killing me softly…"

One of the most popular sessions in the Senior MRx's seminars is the session on price sensitivity research. (You can also read about this in the book, User-Friendly Marketing Research 3rd edition available at National Bookstore or the AIM Library.) What you'll also learn there is that consumers would rather be slapped with one big price increase instead of a series of small increases. (Of course, if you are Meralco or Caltex, that's a different story.) When you increase prices little by little on a regular basis, consumers feel the pain. Some describe it as if they're being slowly stabbed with a blunt screw driver. Some consumers compare it to going to a dentist to have an abscessed tooth pulled out. "Don't do it slowly! Do what you've got to do! Pull it out and let's get the pain over with!"

What they'd rather have you do is to give them one big punch/punishment, one time, with the next one to come, well, two years from now when Noli de Castro or Bong Revilla makes a run for the presidency. Only God, or Lucio Tan, knows what the price of oil and the exchange rate will be by that time. So keep a copy of this column, it will come in handy again in 2010.

For comments or questions, email us at marketingrx@pldtdsl.net. The Best of MarketingRx for Entrepreneurs is now available at National and Powerbooks. You can also purchase it here.