Managing Director & Senior Partner; Global Leader, Marketing, Sales & Pricing Practice
San Francisco - Bay Area
Companies are facing stiff consumer headwinds when they make highly visible pricing changes. Consider these recent events:
Major banks such as Bank of America, JPMorgan Chase, and Wells Fargo halted proposed monthly usage fees for debit-card purchases after they experienced a high-profile public backlash.
Verizon Wireless responded to intense pressure from social-media activists by rolling back what it called a $2 “convenience” charge for paying bills online or by phone.
Netflix experienced a storm of protest over its plan to raise prices (they went up anyway) and to split its service into two parts—streaming video and DVDs by mail (this move got shelved).
Privately owned toll booths in Greece have been occupied by hundreds of members of the “I won’t pay” movement protesting, among other things, tolls on formerly free roads to finance new construction.
Many businesses have felt compelled to make decisive pricing moves in response to regulatory shifts such as the Dodd-Frank banking-reform legislation in the U.S. or severe economic swings such as soaring raw-materials costs and softening consumer demand. Technology has compounded the effects of these forces by making it easy for a handful of consumers to coordinate powerful pushback campaigns directed at allegedly unjustified price changes. In fact, a single activist using social media has been able to mobilize many of her fellow consumers against pricing actions by both Bank of America and Verizon.
In the past, companies could afford either to ignore a minority of unhappy customers or to respond to individual pressure with targeted marketing. Now, collective pressure makes ignoring consumer complaints a much riskier approach. It also requires that companies possess the public relations savvy to anticipate and eventually respond to such pressure. As a result, companies must now devise more nuanced pricing policies for different situations and must shape their messages more carefully when making major pricing changes.
Companies typically make the mistake of viewing themselves as having only two main pricing choices when they face pressure from consumers. The first option is to boldly change prices and explain the rationale from the executives’ perspective. This was the approach taken by the companies cited at the beginning of this article—and they suffered substantial losses of customers and revenues after the public collectively torpedoed it. Alternatively, the second option is to sit back quietly and let prices remain unchanged, leaving money on the table or accepting a deterioration in the economics of the business.
In both cases, companies feel damned if they do change prices, and damned if they don’t.
Yet a middle path exists for companies that want or need to change prices while managing the effects of pricing pushback. Five practices remain critical to the success of this strategy:
Take a nuanced approach. There’s no reason why companies have to treat the prices for all products in the same way. Some items may be priced too high or too low, in terms of the value and benefits that customers receive and in comparison with the competition. By changing some prices more than others, companies can adapt to these circumstances in a more nuanced way. For example, a consumer business found that customers repeatedly rejected an across-the-board price increase of 2 percent. But after analyzing the relative value of its products, the company decided to adjust prices individually, increasing some and decreasing others. This initiative resulted in an average price increase of 3.5 percent—and a subsequent rebound in the company’s stock price. Such a nuanced approach has the further advantage of making collective pushback campaigns harder to coordinate because different customers will face different price changes.
Offer a choice. Companies need to offer alternatives—accounts with more services than others, for instance—and explain the tradeoffs clearly to consumers. In spite of facing some pushback from consumers, airlines have been able to implement fees for checked-in baggage and charges for food on flights. They have been successful because customers have a choice of either checking a larger bag or carrying a smaller bag onboard—or of bringing a meal or buying one on the plane. Another way companies can offer a choice is to allow some customers to stay at an existing fee structure without access to new and improved services that are available at higher price levels.
Change the value proposition. Companies can look carefully at the products and services that deliver differentiated value to consumers, opting to change either the prices or offerings of these rather than raising prices on more commoditized offerings, for which consumers are less likely to tolerate an increase. To further justify the shift, companies can change the value delivered by a product or offering at the same time they change its price. For example, a major European bank needed a new revenue stream after regulations eliminated the standard practice of fund managers compensating the bank for its business. To offset the resulting loss of nearly a quarter of its former revenues, the bank expanded an existing service, including offering an enhanced view of accounts on the Internet. The bank increased transparency about the added value that customers were receiving in exchange for an increase in price.
Emphasize fairness. Consumers generally consider rising costs to be an acceptable justification for a price increase, particularly when they can clearly see the effects elsewhere, such as at the gas pump. Likewise, they tend to push back less when pricing changes are needed to address a business problem considered important to consumers and the company alike, such as keeping local branches open or making large investments to improve safety. One-sided, unintuitive rationales often fall flat. In the banking-fee example cited above, the bank pitched the new service in terms of delivering “clean,” or ethical, banking.
Keep it simple. Companies can adopt straightforward communications about something complex if they have a catchy message. For example, a railway company in Europe explained that it was raising prices overall but emphasized that half of its customers would have the same or lower prices. That said, effective communication does not mean that every message should be simple and direct. Instead, it demands being clear about what companies are making simple and what they are actually making more complicated, including the price levels of the sometimes thousands of products they sell.
In the “new normal” of increased consumer pushback, companies can learn powerful lessons from the pricing experiences of others. Consumers have certainly gained tremendous power, but companies can restore the equilibrium—if they implement best practices that tip the balance back in their favor.