Raising price isn’t a strategy - here’s what is
“Just raise your prices”
Says every small business consultant on LinkedIn.
Sure, the math usually supports this as the way to generating more revenue. But raising prices without a strategy can damage your competitive position and limit your profitability long term.
As a head of finance for $B insurance companies, I’ll confidently tell you pricing is one of the most scrutinized, tested, and modeled decisions in the entire organization.
It’s not a simple money-making lever, it’s a strategic decision.
Have a pricing strategy
Before you simply raise prices, let’s take a minute to talk about strategy.
Your strategy should tell you when, where, and how much to raise prices.
It doesn’t have to be complex (like an insurance company), but it should exist.
Big companies will:
Segment customers
Test price changes
Tie price to value
Measure and forecast expectations
Most companies don’t need that level of sophistication, but pricing can become a competitive advantage if you know how to leverage it.
What big companies actually do
Let’s break a comprehensive pricing strategy down into a simple framework that you can implement today:
Who
You could raise prices on everyone. Or you could only raise prices on less profitable customers.
It could be those who call to complain, the ones who pay late, or whose situation is more complex.
And “raising prices” can get creative for them - maybe you could implement a late fee. Or a credit card processing fee. Or a new tier of service with higher levels of support.
But part of your strategy should be a target profit margin by customer segment. That’s the important part.
What
Remember when Costco raised the price of their hot dog?
No?? Yeah, me either. It’s because it’s never happened (that I can remember).
They know that pricing matters more on certain goods/services than others. We call this concept price elasticity.
In insurance, we know that customers with only an auto policy are far more price sensitive than a customer with an auto and home policy.
And did you know that insurance companies barely make money on auto insurance alone? They almost all price their auto insurance to only make a few pennies per dollar.
What products and services you raise prices on matters. I recommend you have a low margin front end (the costco hot dog) with a higher margin back end (prepared meals and trampolines).
When
Price changes almost always trigger shopping.
Here’s a fun fact for you: insurance shopping is triggered more when prices go down than when prices are unchanged.
But data usually also shows that inflationary price increases (3-4%) per renewal are most effective long term (compared to doubling price after not touching it for years).
The point here is that you have everything modeled and tested before/during/after the price change. Hone your assumptions on churn, take rate, etc over years of different kinds of price changes.
Where
Im sure you’re aware that your insurance price is highly dependent on your zip code (and even sub zip code).
It also matters where you drive and what time of day (if you use the apps that track your driving).
Why?
Insurance companies know that your location says a lot about you as a customer.
Oh, you live in the nice neighborhood where all the other rich doctors live? You only drive 1 mile to work and back each day?
If you’re an electrician and know all the houses in a particular neighborhood were built the same way with garbage wiring, you can start to develop your own pricing model by location.
People in similar circles talk to each other. So pricing them all the same will save you a headache.
Why
By now you should have a legit pricing strategy with some nuance to it.
But the final piece of this is the most simple. It’s to price based on your close rates for sales or customer churn. That’s you listening to your customers and responding to the market.
Even the biggest companies in the world will raise and lower prices based on customer behavior, then manage profits with expense cuts or other operational improvements.
This is maybe the single biggest pricing lesson I could teach you - price to the market, then create operating leverage with your size and operational discipline.
Remember, price isn’t a profit lever (by design). It’s a marketing tactic.
Sometimes you can’t price your way out of a sloppy business.