Price Increase By Any Other Name

Increasing price is not easyIt requires careful review of customers you want to serve, their needs and alternatives available to them. Increasing price of an extremely popular product is even harder. When hundreds of millions of people buy your product and repeat that at least every two years increasing price is the hardest task. There is the reference price concern, customer backlash, unpopular social media outbursts and many other risks.

And yet Apple recently increased price of its iPhone 6. Did you notice?

Price increase or shall I say pricing right after a not so right price has to be done if a business wants to increase its share if value and grow its profits. There are many ways to do this – many wrong ways and many right ways. All the wrong ways start with the product and the business interests. All right ways start with the customer.

One naive approach would be to simply increase the price points across the board – say by a preset arbitrary percentage – and hope the customers won’t notice. Customers always notice due to reference price effect. Reference price is the price customers are used to paying for a product and expect to pay next time. Any increase from this level will be felt by customers and perceived as pain. You can see examples of this from a food truck arbitrarily marking up its prices to a tablet maker thinking their products deserves higher prices.

All the right ways start with the customer, base it on current revenue mix, be selective in increase and focus on scaling value more than the price increase. You have seen examples of this with Starbucks and Netflix. Starbucks increased prices only on its cheapest drink. Netflix limits options available on its lowest monthly subscription option.

Then there is product or price unbundling. Separate out the value options that used to be included and charge for them like airlines did. This of course has its challenges and requires careful execution.

Most successful approaches give customers reasons for the increase. It is never, “we want to increase our profits” or “our products deserve it”. There are always other reasons, like cost increase and regulations.

Of all these successful and right approaches one stands alone – how Apple did it. Its approach and expected results are far superior to anything else we have seen before.

They didn’t change any price points – they are exactly same as before. They did’t unbundle. They didn’t take away value customers used to get. They actually gave customers more value than they use to get. How is this a price increase or how is this going to help their profit?

Customers don’t make their choices in isolation or on absolute value. They have options. Even when a customer is a diehard stand in line for 12 days Apple fan they have 3 to 6 iPhone options. For each option customers perceive different value and are willing to pay different prices. When the net value they get over prices they pay (consumer surplus) is highest for an option, they will choose that over others. Price alone is not a factor and lowest price does not win always. If increased value in next higher price point delivers more consumer surplus than the lowest priced option a rational customer will choose the higher priced version.

That is exactly what Apple did. It kept the price points the same, the value of lowest priced 16GB iPhone 6 the same but significantly increased the value of two higher price point versions. They essentially gave customers higher consumer surplus with 64GB and 128GB versions.

This results is many (if not all) who otherwise would have chosen the 16GB iPhone willingly pay $100 more to buy the 64GB version. Effectively a price increase!

This is pricing beyond excellence.

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