How to increase your prices

Pharmaceutical company Valeant acquired heart drugs Isuprel and Nitropress in 2014. As soon as they had done so they raised the prices of the two drugs by 600% and 300% respectively. Isuprel now costs US$1,346.62 per vial and Nitropress, US$805.61 per vial. We couldn’t have a better example of what not to do to raise your prices. So serious were the consequences that the company’s officers have now been questioned by politicians. The now departed CEO of Valeant made his exit with an apology for his “aggressive” management of the company. I’ll bet “aggressive” is what he was appointed for originally.

TESCO, the big food retailer, were caught in a trap of price increases when they should have been looking at price decreases. So persistent had inflation been that they got into a habit of regular price increases – and continued doing it even when there was deflation. A good example of system overriding thinking.

All suppliers need to raise prices from time to time. Increased costs, improved performance, a need to fund more expensive research, repositioning your product or service, all call for higher prices. These reasons are producer driven. Selling is about being customer driven. Customers don’t like price increases so how you implement them is important to your future prosperity. Badly handled price increases can ruin a perfectly sound business.

Rule No 1 is do it little and often. People adjust fairly quickly to new prices, often after an initial grumble. The less the increase the less there is to grumble about. Banks know this. They start by charging $10 and then another $10 and so on until you are paying big charges but without having had to go through a huge increase at any one time. You probably forgot to complain on the way for fear of being thought too poor to pay $10.

Rule No 2 is about how much to explain a price increase. You get different answers from different businesses. People are generally reasonable and a sensible explanation of a price increase is usually tolerated. But that depends on who it comes from. A well-known bank that has the doubtful distinction of having been fined more than any other bank in the world has just announced that it is reducing its interest on deposits by 75%. Measurable interest is already paid only on big deposits. Now the interest is reduced to virtually nil. I see this as one step away from negative interest. You can be certain that’s where this is heading.
They will, I am sure, be glad to lose the account I have had with them since 1951.

Prices are determined by a number of factors including customer satisfaction and competition. Getting yourself into a price war is no way to develop a business. How do you avoid that? Position yourself correctly in the first place. Where will you be on the quality scale? You can only decide that when you express your purpose for the business clearly. Having done so you will then assess customer satisfaction by how well you retain them. Clearly in the case of the above bank, very well until today. Now the break has come.

When that happens beware, you have over-priced or under-performed.

Or both.