The Sneaky Price Increase

Harvard Business School´s Working Knowledge site has just republished a fascinating piece from 2004 in which HBS marketing professor John Gourville tells us something we should already know, but don´t: Consumer products companies "raise prices" on us constantly by reducing the quantity of product they sell for a certain price. (Examples: coffee, breakfast cereal, ice cream.) Prof. Gourville maintains that these companies have found that reducing quantity while retaining the price point works better than keeping quantity constant and increasing price. Companies selling technology services to businesses face similar issues underlying costs (typically labor and benefits) rise, yet customers don´t want to pay more. It´s even more of a challenge, since tech buyers have come to expect prices to decline for the products and services they buy.

One way to implement the sneaky price increase in business is to reduce the service level of an offering (say, the maintenance response times or the hours tech support is available) and keeping the same price. Yet these items are frequently contracted and not able to be altered freely. Also, the people pushing back on price (procurement or finance) are typically different from the people using the service (IT or operations).

As opposed to the sneaky price increase, many services companies would be better off using a tool that they already have at their disposal the regular, small, price increase. Many contracts allow the supplier to change price at certain periods of time (often yearly), yet many companies don´t use this tool. As a result, prices don´t change for years--and then, when a price increase is unavoidable, it´s surprising and painful to the customer.

So, negotiate the ability to raise price into your services contracts. And then, use that ability regularly, in small doses. Your customer relationships will be better for it, as well as your bottom line.