A price increase can raise profits considerably but can also make the clients unsatisfied. A major circumstance provoking price increases is cost inflation. Companies often raise their prices by more than the cost increase, in anticipation of further inflation or government price controls. Another factor leading to price increases is overdemand. When a company cannot supply all its customers, it can raise its prices, ration supplies, or both. Each of these has a different impact on buyers. There are also cases when a company needs to increase prices just because they did not properly analyze the numbers and they can’t afford to keep the prices down anymore. Or, they didn’t do their homework and didn’t set the right prices from the beginning. No matter the case, there are some difficulties that you are about to experience once you increase the prices.
Even though in some cases, the price increase can have a positive meaning to customers, for example, that the item is “hot” and represents unusually good value, consumers generally dislike higher prices. The most important thing is that the company must avoid looking like a price gouger. Consumers can interpret any pricing differences as unfair. Especially, when there is no product customization, differentiation or product upgrade. There are several techniques to help businesses avoid sticker shock and a hostile reaction from consumers when prices rise. One is maintaining their sense of fairness, such as by giving them advance notice so they can do forward buying or shop around. Sharp price increases also need to be explained in understandable terms. Making low-visibility price moves first is also a good technique: eliminating discounts, increasing minimum order sizes or apply a discount for big volume orders. However, you need to arm yourself with patience and be ready to give a good explanation. When we had to raise the product prices in our business, we blamed the fresh produce providers. We explained to the customers that in order to keep the quality of our products we had to raise the prices. We also presented the other alternative, which was to lower the quality of the raw materials. Almost all the clients agreed that keeping the quality of the products was a deal-breaker for them, so they accepted the prices increase without arguing too much about that.
The introduction or change of any price can provoke a response from customers, competitors, distributors, and suppliers. Competitors are most likely to react when the number of firms is few, the product is homogeneous, and buyers are highly informed. Therefore, understanding how competitors will respond to your actions should be a critical component of strategic decision making. So, you have to ask yourself these questions: will my competitors react, are there any options that the competitors can actively consider? If the answer is yes, what is the most likely option that my competitor will consider? From this step, you will have to create a list of options your adversary is likely to consider. Of the options your adversary seriously considers, he will choose the one that is the most effective according to his analytic technique. For example, your competitor can make a discount on the products that you have just increased the prices for, assuming that you sell the same products. Let’s say you increase prices for fresh drinks because the raw material is expensive and the producing process is time-consuming. What your competitors can do is: lower the prices for that particular product, create a bundle offer that can include a discount for a juice as a side to a meal, or even do nothing because they still have a lower price than you. In this last case, maybe they will concentrate their efforts in advertising the lower price.
Since competition is everywhere, you need to know how to deal with competitors in business, whether you’re a startup owner or an experienced owner. You should never underestimate your competition, you need to have a general idea about your competitors and their price moves.