Permission to Raise Prices

You read it right. It is permission that you need to raise prices. Raising prices is not a prerogative. Those who thought otherwise and said their products deserved the price tag saw their business run to ground.

It is not permission from your CFO or shareholders. It is permission from the customers you chose to serve. It is important to see the narrow definition here – “customers you chose to serve”. First the word customers clearly indicates they pay you for your product. Second it is your choice of who to serve since you cannot and should not go after every one with a need and willing to pay for filling that need.

The permission is intrinsic. It is in the form of additional value you deliver to your customers above and beyond the price they pay. More precisely it is the perceived value of customers. When you are not mopping up all the value created in the form of higher prices you have three things in your favor

  1. You build a moat against competition from entering with a lower price
  2. You expand the target segment to bring in those with lower willingness to pay
  3. You earn the permission to raise prices in the future

That is exactly what Chipotle has and says it does when it decided to increase prices,

“We believe we’ve got a lot of pricing power,” Ells said. “We’re not going to spend all the pricing power we’ve built up over time, we still have some in the bank.”

How did they get there?

It is by choosing the customers they want to target – those who do not hire a burrito just for utilitarian purposes but also for other higher order reasons. Reasons like green, healthy, fresh and socially responsible.

If the latter factors are not relevant to a set of customers they will not be willing to pay even the current high prices of Chipotle let alone its new higher prices.

The fact that their chosen customer segment believes there is more value than the price they pay for Chipotle can raise prices without losing customers. They continue to signal that value to customers, reminding them why they hire Chipotle, through better branding and content marketing.

And if there is any doubt to any one why they are increasing prices there is always the time tested reason,

The price hikes aim to address pretty much the only problem that roiled Chipotle during what was an otherwise pretty good quarter: Food inflation. The prices of beef, cheese and avocados have all reached elevated levels in recent months and are expected to stay high. As a result, Chipotle executives felt it was time to pass the cost onto customers.

There are always other reasons to raise prices.

Now a word of caution. Before you run to make your product green, socially responsible, ethically made etc. understand the customers you want to serve and whether those are the factors they desire and value. Without that understanding you cannot expect to set premium prices or earn permission to raise prices

If you like Chipotle, go have a burrito. But do not blindly copy their content marketing, product development or pricing without clear understanding of your customers.