By Sergio Corbo
Netflix is raising prices and is already raising a lot of hype.
Companies spend or dream of spending millions of dollars to understand their demand elasticity curve and price accordingly.
The airline industry is a good example. Complex pricing optimization software continuously updates prices for a chosen route. Buying an airline ticket is a pure game of luck: wait five minutes and prices can go up or down by a significant percentage, just because a machine has calculated that you are willing to pay for it.
While Southwest started as a low cost carrier, sometimes is now the most expensive option, even if it still maintains fewer frills than other airlines.
Is it OK? It depends. If Customers see the value there is no issue with higher prices. When Southwest at the highest price is the best overall option Customers take it: the company packs good profits and Customers are happy.
But, when an airline charges the highest price and then is the only one to cancel the flight on that route, then Customers feel that the higher value is no longer there.
“I have never been afraid of increasing prices. I have always been afraid of price increases that are internally driven and cannot be justified to the Customer with a value story.”
It is all about how the Customer perceives the value.
Therefore, the right question to ask becomes: is Netflix going to offer more for the higher price, or is there any other reason acceptable to the Customer? Where Netflix needs to spend time is explain what Customers are getting for the higher price.
Companies frequently fail at giving a good reason for price increases in their announcements. And that is where demand snaps back with a loss of market share, at times severe. In fact, the failure has the effect of spring loading demand elasticity: the market share loss is attributed to the price hike but in reality it is due to failing to communicate value to the Customer.
If prices increase because the offer is materially superior and desirable for the Customer, this needs to be properly announced and explained before the increase occurs. The company needs to build anticipation and create an environment where the Customer looks forward to a value increase event. The company needs to get the Customer to think in these terms: “I am getting a new offer, which is exactly what I want. Yes, it comes with higher price but the lower cost alternative does not have what I need”.
If material or operating costs grow, the company needs to explain to the Customer what steps have been taken to modify the business model and absorb some of those costs, before passing the remaining share to the Customer. That way Customers will see value. Good Customers want companies to be successful and will accept a price increase due to cost, if they see that the company is working to bring the right offer at the right price. In many cases the very same sources of price increase that affect the company are also felt by the Customer. A good communication can help Customers mitigate their costs: “Our costs went up, we took these steps to mitigate and we had to pass the rest to our Customers. Here is what we learned from our mitigation efforts that can help our Customers preserve their value”.
Many times the internal debate is about the percentage of the price increase. It does not matter. Whether it is a modest 1% or a sizable 20%, what counts is how justifiable it is for the Customer. Clearly 20% requires a lot more communication effort, but a 1% unjustifiable increase will hurt as much as a bigger percentage if the Customers does not see value.
I have never been afraid of increasing prices. I have always been afraid of price increases that are internally driven and cannot be justified to the Customer with a value story.
I have never done price increases: I have only done value increases. That has helped me more than once raise prices and market share at the same time, because it was done for the Customer.
Sergio Corbo is a commercial senior executive who helps fortune 500 corporations serve the Customer and deliver measurable results to investors. You can follow his thought leadership at www.linkedin.com/in/sergiocorbo