Pricing and Customer Retention
Pragmatic Institute’s box of the month for November is Customer Retention. This is an activity, or objective, that price can dramatically impact.
First, the easy answer for customer retention is don’t raise prices. Do you remember in 2011 when Netflix raised their prices, dramatically? In a month they lost 800,000 subscribers. Think of what happened. Individual Netflix subscribers were paying their monthly fee, month after month after month. They weren’t thinking about it. Then, they get the notice that their fees went up. At that point each person reevaluated their subscription. Not only were they upset that the prices went up, they also took the time do think about whether or not they were using the service enough to justify the price.
Whenever you raise your prices on a recurring revenue type customer, you almost force them to make the purchase decision again. Do they really need your product? Is there another more cost effective provider? Without the price increase, they just keep writing checks without thinking about it.
Sometimes though you really want to raise prices. How can you do that while minimizing the number of customers who defect from you. The obvious answer here is you don’t have to raise prices on your current customers. If you only raise prices on NEW customers they don’t see a price increase because they didn’t even know what the price used to be. Your current customers don’t see the price increase.
If you do have to raise prices on current customers, then you want to put together a plan to keep them as happy as possible. Have a great justification for why you are raising prices. Describe how difficult it is for you to raise prices. Finally, try to do something nice for existing customers. For example, you may tell them you are increasing prices but will hold their price constant for 6 months.
Just realize, pricing has the potential for huge negative impact on customer retention. Usually price is not a consideration when we’re putting together retention programs. Unfortunately, we all too often realize, after we’ve implemented a price increase, the impact price can have on retention.
Photo by Meridican
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