In my last post, Pricing Strategies for Reopening Businesses, I wrote that many firms should raise their prices. I suggested some pricing strategies to consider, including a Covid-19 surcharge. Many B2C businesses did that, and customer complaints quickly increased. So, was I wrong? Is it too risky for reopening companies to raise prices? No! By following social distance rules and regulations, most businesses are only able to serve a fraction of their consumers. They won’t be able to survive by limiting their customers and their prices. Be strong. It’s ok to increase prices now.
I have written ad nauseam that customers don’t care about your costs. They care about how much they must pay you compared to their next best alternative. Customers also often use the price they paid you the last time as a reference point for their alternatives. If you have raised your prices or added a surcharge, some customers may quickly believe your prices are too high. They may also say they are going elsewhere. But remember, Pay Attention To What Customers Do, Not Just What They Say. If you are using all your newly limited capacity at higher prices, your customers are accepting those prices. Stay strong.
Breakeven
Nobody wants to lose customers, and I don’t want you to either. But, think about this – if you are only allowed to operate at 50% capacity, you are probably losing customers anyway. For illustration, let’s assume you operated at 75% of capacity before the Coronavirus. To meet the new requirements, you need to lose 1/3 of your customers anyway. It is possible that 1/3 of your customers will avoid the risk of shopping, dining, etc. and will stay away regardless of your prices, but you also may have more demand than you can serve.
Now think about price increases versus your volume. You should not compare revenue before and after a price change. You should compare your gross margin. Remember, if you are selling fewer units, your costs decrease. As an example, if you increase prices by 10%, and your unit volume decreases by 10%, your revenue would decrease slightly. However, your gross margin would probably go up. In this example, if your gross margin before the increase was 25%, gross margin dollars would increase by 26%.
I don’t want to add spreadsheets to this blog post but do the math. You can lose more customers than you think and still improve profitability with a price increase.
Social Media Noise
The popularity of Facebook, Instagram, Twitter, etc. means complaints can be broadcast quickly and potentially to a wide audience. More importantly, many users who would be respectful in person choose to “shout” and try to antagonize businesses. That mob mentality can sometimes become too much for a company selling to consumers. That may mean a Covid-19 surcharge is not the best tactic. In the article I cited above about customer complaints, the surcharge was only 5%, which is pretty modest. The anger came from it being identified as a separate line item. Simply changing prices might be a better tactic.
Supply and Demand
My final point is about supply and demand. There is no doubt that people are suffering economically, and spending is going to be down for a time. That said, there is some pent-up demand for many services like restaurants, bars, salons, healthcare, and other personal items. With limited capacity, supply will probably be lower than demand for awhile. The best way to allocate that limited supply is with prices. It is also a way to help your business survive. You may have to lower them in the future, but it is ok to increase prices now.