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BUSINESS INSIGHTS”

                                                  An Occasional Newsletter

 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: 

  1. 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.

  2. 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.

  3. 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.

  4. 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.

Copyright ©2014 by Ken Wilson    All rights reserved
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