ServicesRevenue

The Best Way to Raise Service Prices

In the preceding post, I wrote about how some marketers just raise service prices without adequate planning or change management.  Why change management?  Because your customers need to understand how the underlying value of your service has changed - hopefully in the positive direction.  Value justifies price.  Therefore, if you're going to raise prices, you need to communicate the positive change in value first. If you plan it well, and your customers get your message, your price increase will be sustainable.

Here's a timeless example from the early 90's on how to do this right. As you'll read, it takes time.  The time required is proportionate to the magnitude of your price increase.

The setting is a software company with a decent installed base of loyal users.  At this point support is free to any registered user.  Management runs the numbers and arrives at the conclusion that offering a competitive level of excellent support requires an investment in headcount, training and systems (knowledge base, skills-based routing phone system, user community, etc.)  In a free-support model, product margins pay for these resources.  Since margins are under pressure, funding support has to come from another source.  As a result, management concludes offering fee-based services is the only viable option. 

Transitioning customers from free to fee-based support is obviously a monumental change. Management did a few things right:

• Improve Service Delivery: Deliberately, management invested in improving the quality and service level of the free support being offered.  They reasoned that if customers' impression of the service was negative, asking them to pay for more of the same bad service was not going to work. Exception: if you're an airline exec, this won't make sense to you.

• Ask Your Customer About Their Unmet Needs: The easiest way to earn more is to deliver more. Why not ask customers what they want?  In this case, management set out to find out what customers were willing to pay for.  Their research pointed to new, desirable benefits they had not offered before.  For example, customers said they would value talking to someone who can hand-hold them through a procedure.  The company's policy did not permit hand-holding or training customers on the free support service. You had to have a specific problem to get free help. This was good news for customers and the company.  The company didn't need to hire new resources with significantly new skill sets.

• Anchor Your Justification in Solid Business:  When it came time to announce the change, management justified it using multiple arguments, each of which was strong on its own.  These included:

1. Declining product prices won't sustain the growing cost of great service.  i.e. there's a material change in the business model that requires this price change.
2. You, the customer, need new service levels that the company must invest in to deliver to your satisfaction. Only customers who value these services are going to pay for them.
3. The value of the new proposed service easily eclipsed the asking price. Customers did agree with this during the research and after launch as evidenced by sales.

• Communicate internally first: In keeping with good practices, management announced this initiative internally first. They faced fierce resistance across the board.  The support staff didn't like the change because they believed the company was reneging on its promise to customers. Marketing didn't like it because they feared the change signaled a hard-to-use product with a high cost of ownership. Finance didn't like it because it was too much work to figure out how to recognize the revenue.  Some of this resistance was good as it helped solidify the business case for the change. The dialog was interesting in any case.  In the end, the business urgency of generating urgently needed revenue took precedence.

• Communicate externally and repeat: Management braced for even tougher resistance from customers. It announced the change with a delayed effective date.  The idea was to give customers time to react to the change. If you don't like surprises, chances are your customers won't either. They repeated the message often to ensure customers heard it. The anticipated customer back-lash didn't happen. Some customers protested but they were a few. Most customers understood. The interesting thing is that enough customer embraced the change to an extent that was worthwhile for the company. 

• Deliver as Promised: Management went out of its way to ensure customers were satisfied with the free and the fee-based service offerings.  They feared a wave of product returns (if free support was unsatisfactory) or refunds requests (if the fee-based service was unsatisfactory).  The early communication process had already addressed objections. For customers who benefited from the new fee-based service, the testimonials were genuine and supportive.

The above process consumed the better part of two years. Most price changes do not involve such a significant change, but if they do be prepared for the duration.  It all comes down to classic change management - who is affected and how do they perceive the change.

Raising Service Prices

At any point in time, some service marketer somewhere is planning for or is in the thick of raising service prices.  A reasonable price increase from year to year is expected.  May even raise customer questions and concerns if skipped particularly in B2B markets.  Trouble brews when marketers raise prices without adequate planning and change management.

I just had a conversation that involved a decision to raise maintenance prices.  It struck me how careless most technology companies are about a key decision such as this.  They procrastinate about managing their service prices and then they wake up one day and decide they have to catch up. This usually means a sudden and significant price increase.  Here's one proven way to get customer riled.

The other issue here is that more often than not, price increase decisions are disconnected from the underlying value proposition.  If you're going to raise prices, you better offer great value or incrementally more value first.  These days, the major airlines are doing an excellent job demonstrating how not to do this.  They start charging for a basic service they cannot deliver on, checked baggage.  Airline executives must be hitting a new high in arrogance and ignorance.  Someone made the case that shipping your bag with Fedex or UPS is more convenient and cost effective.  Years ago at Claris, David Aune spent nearly two years revamping Technical Support and adding new, adequately-staffed deliverables before the company could offer fee-based support for the first time.

When it comes to pricing increases, please do it right and spare your employees and customers the agony.

 

Marketing Backup Services: A Clever Act

Ciro Cetrangolo wrote a nice article in his company's newsletter promoting back up services to his clients. He was kind enough to share it with me.  In a nutshell, he called his clients' attention to the importance of proactive backup and disaster planning in a very subtle and persuasive way.  His message was about risk avoidance and convenience - a compelling recipe.  Here's what I liked about it:

• Natural Flow: Ciro wrote naturally as if he was speaking. He spoke from experience. He didn't lecture nor did he toot his own horn.


• Educational: He delved into enough detail without getting technical. He was informative and logical. He explained how different backup technologies have evolved. He laid out pitfalls and problems.  For example, tape backup is great and has been around for a long time, but a human being has to change the tape when it reaches capacity or wears. In a small business or office, this can be an issue.  For disk drives, he explained how periodic cleaning, if neglected, can affect reliability.  Easy to do, he said, but also easy to forget to do.   Then there's the issue of accessing support.  Backups are performed at night.  That's when problems are likely to happen and it may be inconvenient or costly to get good help. It gets worse if your company runs more than one shift.

• Options Explained: There was no hard sell.  He offered options and explained the consequences and risks. He contrasted on site ( local tape or disk backup systems ) - with off site ( remote or online backup options ).  He laid out the realities of restoring from a remote backup and the time that takes. In the end he recommended a blended version of both options.

Ciro closed the article by describing his company's recommended setup.  You get to this part after reading about the potential problems with each option and you get a sense of relief.  There is a way to deal with this problem.

I'm betting his target audience of small business will find it useful enough to pick up the phone and ask him to spec a new backup process for them.  Nice going Ciro.