How to communicate a price increase to your customers

There is a right time to disrupt your prospect’s status quo—when you are trying to displace a competitor, for example. But this will have the exact opposite effect when you are trying to renew existing customers and get them to pay more.

Last month, I wrote about the crisis of confidence and concerns over effectiveness that marketers and salespeople feel when it comes to communicating price increases.

This month, I want to share the results of our new research project to determine the best messaging framework for improving this difficult task.

Don’t Challenge Your Customer

The first important finding completely flies in the face of all the hype surrounding the idea of provoking and challenging customers. There is a right time to disrupt your prospect’s status quo—when you are trying to displace a competitor, for example. But this will have the exact opposite effect when you are trying to renew existing customers and get them to pay more.

Previous Corporate Visions research found that challenging the customer can backfire when you’re trying to renew a customer. But what about when you’re trying to renew a customer and get them to pay more? Our latest research gets to the heart of that second question.

After all, many companies make decisions to get new business in the door with strategies that include offering too-good-to-be-true pricing and concessions, hoping to then “land and expand.” Recovering the discounts you might have conceded to win the business initially often calls for a strategic effort to begin inching the price back up to respectable levels. In other words, ongoing investments in servicing accounts and improving solutions—plus the rising cost of goods—all wind up in the same spot: a post-purchase price increase conversation. Needless to say, a lot is at stake, so it’s essential that companies handle this conversation effectively.

That’s why we collaborated with Dr. Nick Lee, a professor at the Warwick Business School in the U.K., on original research that would provide answers to the following questions: What is the most effective messaging “framework” for communicating a price increase while minimizing risk of a negative reaction?

The Why Pay Study

The experiment was structured to measure three areas critical to the effectiveness and receptivity of a price increase message:

• What is the customer’s attitude toward the vendor after hearing the message?
• How likely is that customer to renew with you?
• Or how likely are they to switch to a different vendor?

To begin, we recruited 503 participants to take part in an online simulation. At the outset of the study, participants were instructed to imagine they ran a small business and that two years ago, they needed to do something to improve employee satisfaction and retention rates because employee turnover was high and it was too expensive to keep hiring and training new people.

One of the steps these business owners took included signing up with a vendor who could help promote a company health and wellness program for employees. The hope was that increasing employee participation would increase employee satisfaction and reduce turnover. At the time, only 20% of employees subscribed to the health and wellness program. The goal was to increase that to 80%—the benchmark for businesses with world-class employee retention rates.

The two-year contract the company signed was nearing its conclusion, and it was time to renew with that vendor or choose an alternative.

Participants were told they’d recently met with some of the other providers they originally considered to see what’s changed in the last two years. They’ve all made improvements and introduced new capabilities, and while some of the improvements are appealing, nothing really stands out. In addition, pricing appears to be similar to what they are already paying.

However, the current vendor partner is now asking for a 4% price increase for the next two-year agreement.

But here’s what participants didn’t know: They were divided evenly into six groups and placed into different message conditions, each of which took a different approach to framing the price increase. Importantly, in each condition, the message opened the same way, by documenting the business results to date. And all of them proposed the same 4% rate of increase to the annual cost of the program.

Meanwhile, each of the six took a different path to justifying the price increase as described below:

• Introduce unconsidered need: This message introduced new research that revealed a new opt-out approach to increase plan participation, whereby the company would “flip” its current opt-in approach and all employees would be automatically enrolled. It explained that this would require some new services that cost 4% more, but assured the customer that he or she would recover that within a year based on improved performance.
• Improved capabilities with anchor: This message explained how the customer would be getting new capabilities as part of the renewal to increase performance and progress on top goals. It explained, however, that these new advanced capabilities would add 8% to the annual cost of the plan. But the vendor agreed to reduce that by half because the person is a good customer, resulting in a 4% increase.
• Improved capabilities without anchor: This message was the same as the one above, except there was no “anchoring” of a higher price point to begin with. It simply presented the new capabilities and performance as a justification for a 4% price increase.
• Improved capabilities with anchor and time-sensitive discount: Again, this introduced the improved capabilities in the same way and explained how they will increase performance. And it described how this will add 8% to the annual cost. But it then offered a time-sensitive discount that said: If you renew before the end of the month, those additional costs will be reduced by 50%, for a net 4% increase.
• Cite external cost factors: This message blamed the price increase on outside cost pressures. Specifically, regulations and responses that necessitate an 8% cost increase. In a friendly gesture, this approach used an anchor, explaining that the vendor is willing to absorb half of that extra cost burden, but must pass along the remaining 4% increase in annual program cost.
• Reinforce status quo bias: This message justified the price increase by reinforcing status quo bias—reminding customers about the potential risks of making a change and about how much time and energy bringing in a new vendor could require. It also introduced the new and improved capabilities and expected positive impact on performance, while proposing a straight 4% price increase associated with the advanced solution and anticipated improvement in results.

The Results

The experiment revealed that the “challenging” provocation-based message that introduced an unconsidered need was the least effective in terms of framing a price increase by a statistically wide margin.

Participants in the provocative condition were found to have 18.8% less favorable attitudes toward the message, compared to participants in the new capabilities with timed discount condition, which performed the best in this regard.

In addition, participants in the provocation-based message were:

• 15.5% less likely to renew with their current vendor, compared to participants in the new capabilities with time discount condition, the highest performing message in this area.
• 16.3% more likely to switch to another vendor, relative to participants in the status quo bias reinforcement condition, which performed the best in this measure.

The Winning “Why Pay” Messaging Framework

The results reveal that the winning messaging framework embodies two things:

• First, it will reinforce the status quo biases while introducing key, new capabilities to solve existing needs, not introduce new needs.
• Second, it will also anchor high with the new price before giving a timed, loyalty discount to sign the renewal.

Below is an example of the best-performing messages in the study. (It is not meant to be a script, but a framework for your consideration.)

• Document results to date: “You have made great progress on your goals over these last two years. You’ve seen health and wellness program participation grow from 20% to 50%. Your employee satisfaction scores are up, and you’ve said some employees have even taken the time to thank you for the changes you’ve made. In addition, your employee retention rates have started to improve, which you said was the ultimate goal of making these changes.”
• Reinforce causes of status quo bias: “When you signed up two years ago, you really did your homework and looked at a lot of options before getting your entire team to come to a consensus and choose our company. It was a long process that involved a lot of people, but you ultimately arrived at a big decision to bring this program on board.

As you look at making a renewal decision, it’s important to realize that you are at a critical point in this journey and that it’s important to maintain momentum to achieve your ultimate participation and retention goals. Any change to the program at this point could create an unnecessary risk of losing the positive gains you’ve made.

Not to mention that bringing in another vendor would require you to invest time in getting them up to speed and money on implementation costs and other changes that you won’t have to spend if you continue working with us.”

• Introduce new capabilities: “Over the last two years we’ve been developing new capabilities to drive more satisfied participants, as well as give you confidence that your program is keeping pace with anything else available in the market today. As you consider your renewal with us, we wanted to let you know about two new services we think can have a tremendous impact on your goals:

“The first is a new weekly report that shows non-participants in the program how much benefit that those who are participating are seeing in terms of their fitness and wellness, as well as how much they are saving and benefiting in terms of health care, by being part of your plan versus the alternatives. This kind of communication, on a monthly basis, will provide a gentle nudge to help encourage them to get into the program for the great benefits.

“Secondly, we’ve also added a new smartphone app with online tools, including automatic result tracking, and integration with popular fitness trackers. In tests, these touches have been shown to help your employees get more benefits from health and wellness programs and feel like they’re making progress on their goals. The result has been shown to create higher employee plan satisfaction.”

• Anchor price increase high, introduce loyalty discount: “These new services and functionality will add approximately eight percent to the annual cost of your plan. However, if you renew before the end of the month, we will reduce the price increase by 50%, making it just a 4% overall increase to get this level of service.

“You’re making great progress. Stick with our program for another two years, and I know you’ll get to your 80% participation goal and further increase your employee retention rates.”

Conclusion

There’s an appropriate time to challenge your buyers—it’s just not when you’re trying to renew them and convince them to pay more. The results of the study are clear and compelling, and it’s rare to see such strong and consistent results across such a large sample audience and so many different conditions and categories of measurement.

Above all, the findings serve as confirmation that communicating with prospects and customers across the buying lifecycle isn’t a one-size-fits-all thing. While a disruptive message plays well when you’re trying to defeat the status quo bias and displace an incumbent, it shouldn’t be applied universally—no matter how popular the approach might be.