The other day I was talking to the CEO of a small medical devices firm. During the conversation, she let slip that she hadn’t raised her prices in 15 years! I almost had to pick my jaw up off the floor. After I got over my initial shock, I asked some questions…chiefly three:
Answer #1 - yes. In this particular case, the medical device firm manufactures a specific component of a larger medical device. While a suitable alternative could exist, the switching costs would be high, making this product “essential” for the purposes of this conversation.
Answer #2 – Also yes. Most medical device component manufactures roll out yearly price increases consistently at various levels.
Answer #3 – Another yes. Three for three. Our CEO had just rolled out a new 30-day manufacturing guarantee. Traditionally, medical manufacturers guarantee products have a manufacture date within 1-year of the date of purchase. By issuing a new 30-day guarantee, customers receive brand new product resulting in a longer shelf-life. Bingo!
Now, I was thinking to myself “she could probably double her prices and not lose any customers”. However, this CEO was already wary of a potential price increase, despite the high value being provided to customers. So instead, we focused on the key considerations to quantify and justify a long overdue price increase:
- First and foremost, consider price sensitivity.
Lucky for her, and in many high-value B2B situations, customers are more likely to accept a price increase in the short-term because it can be difficult to find a direct replacement. However, in the longer-term, most products can be replaced. This leads to the second point.
- Talk to your customers.
I encouraged this CEO to spend some quality time with her customers. From the oldest to the newest, go deep to understand everything about their business operations and how they make a profit. The key is to look for the impact your prices have on your customers ability to sell products. There are always new pieces of information to be gained when you let your customers have the floor.
- Create your Value Hypothesis.
Go on a treasure hunt both internally and externally. Create, and more importantly, validate, hypotheses about the value of your business and your products. Understand why your customers buy your products and refresh your own memory on why they chose you in the first place. Your goal should be to find out what financial value your customers gain from using your product and your company.
Despite my initial reaction, this isn’t a horror story. The CEO in this example benefits from a highly valuable product and a highly profitable business. However, in order to make that business even more profitable, she needed to re-ground herself in the value that her company provides for customers. From there, it is simply a judgement call to pick a price increase that feels fair for both you and your customers.
Are you interested in more information on prices increases? Check out our recent article on Netflix, which breaks down their recent price increase.