Managing the Inevitable: Price Increases

We all know about the two things that are inevitable in life: death and taxes. If you operate a business, there is a third inevitability: price increases. Whether it is due to rising costs for transportation, materials, or other expenses t creation of a product or service, passing along price increases to customers is a reality. The decision to raise prices may be rather easy; communicating price increases to customers may not go so smoothly. Just ask Netflix.

Earlier this month, Netflix created a firestorm among its subscribers when it announced that it was unbundling the DVD by mail and online streaming options for receiving movies. Customers who pay $7.99 for mail delivery plus an additional $2 for online streaming will have to pay $7.99 for each plan beginning in September. The 60% price increase for affected customers did not sit well with many of them. The result is not surprising- many customers say they will drop Netflix service rather than be forced to decide if they want to spend $6 a month more for both services. With 25 million subscribers, it will be interesting to see: 1) how many customers follow through and cancel their subscription,and 2) if their departure will have a noticeable impact on Netflix’s profitability.

The problem Netflix created was not that it raised prices, but it did a very poor job of communicating why prices were raised. Do customers deserve an explanation when prices go up? Absolutely! If we are going to talk about being in relationship with customers, part of being in a relationship includes working through rough times such as when prices must rise. In this case, Netflix is dealing with rising costs of home delivery as well as licensing fees paid to movie studios and must stem the tide by changing its pricing models.

When prices must increase, it is imperative that the marketer communicate how the product remains a good value. Otherwise, why should a customer pay more just to help cover costs? Netflix could defuse some of the sting of its price increase by comparing its value proposition (e.g., selection, convenience, and cost) to Blockbuster, Redbox, and other options for movies and entertainment. Never feel that you have to apologize for your price, but make certain that the value offered is never in doubt.

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