Pricing: It’s All About Trust

Do Not Rely On Those Who Do Not Care About You

One byproduct of the economic recession is that companies are afraid to make money.

That’s not to say they’ve given up on maximizing profits, just that they’re trying to minimize the public perception of that profit, and keep any increase in fees as low profile as possible.

Recent examples of this include the Netflix pricing model changes, Bank of America’s $5 debit card fee and Verizon’s $2 bill pay fee.

In each case, the company raised the amount that it charges customers, received a wave of negative feedback from those customers (often through social media) and then reverted to the previous pricing structure to try and keep its customers happy.

The reason these price increases are met with negative feedback is that consumers are smarter. They know more about a company’s product, they know more about a company’s costs, and they have a better idea of what they should be paying for the product or service a company provides.

Just look at the recent changes J.C. Penney made in response to the smarter consumer. According to CEO Ron Johnson, while discussing his company’s new simplified pricing strategy,

The customer knows the right price. To think you can fool a customer is kind of crazy.

In this new economic environment, any company that appears to be making excess profit, or appears to be taking advantage of any opportunity to make excess profit, is villainized by a battered public that now believes most companies are trying to take advantage of them in any way possible.

This public reaction can cause problems for companies that legitimately need to raise prices in order to survive as a business, or to ensure their future survival. Markets change, rules and regulations change, and the competitive landscape changes, all of which can require a company to adopt new costs, or a whole new pricing structure.

So what should a company do when it needs to increase the amount it charges customers?

First, be upfront about the reasons for this new pricing structure.

Have supply costs changed? Has the competitive landscape shifted? Have new regulations forced the entire industry to change and adapt to survive?

Tell the customers.

Second, be upfront about why you need to raise prices instead of adapting to these changes in some other way.

Does your product rely on a single supplier of a specialized good? Has a competitor undercut you with a business model that’s not sustainable in the long term? Are the new rules and regulations that you’re now facing unavoidable for everyone in your industry?

Tell the customers.

Lastly, be upfront about what the increased income from the new pricing structure is going to be used for.

Is the increased revenue going directly to a supplier to cover increased costs? Are you building a stockpile so the company can survive short term shifts in the market? Is the price increase being used to pay new fees and regulations?

Tell the customers.

They’re going to find out anyways, or they’re going to assume the worst, so you might as well steer the conversation in a favorable direction, and make sure everyone is talking facts, not fiction.

If you can’t answer these questions publicly, either because you don’t need to raise prices to stay in business, or because you’re just trying to give shareholders a few extra pennies or the c-suite another day off, then maybe it’s time to re-evaluate the decision to raise prices in the first place.

Of course this will necessitate carefully crafted words from the Marketing and PR departments, and I’m not saying you need to share your entire business model with your customers, but an honest explanation can go a long way towards building trust that can pay dividends in the long run through an increase in loyalty between the customer and the company.

At the end of the day, it’s all about trust.

If you raise prices, and then lower them again, consumers will not trust you. They will think that you either didn’t need to raise prices in the first place, and were just gouging them for extra cash, or you did need to raise prices, and are going to find another, less obvious way of getting that money from them.

For example, look at this Tweet from Harry McCracken:

Canceling an already announced rate hike might put a stop to the PR backlash, but there are still long term consequences that include a net reduction in trust, as your customers are now weary of any change that you make. In the future, even if your intentions are pure, customers will no longer give you the benefit of the doubt, and will instead assume that you’re taking advantage of them and doing what’s in your own best interest, not theirs.

The only way to combat this issue is to be upfront and honest about the situation that you’re in, so think long and hard about any increase in price, because once you go down that road, you better be prepared to finish the journey.

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