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The Impact of Price Rises - From the Eye of the Customer


It is no secret that businesses need to make a profit in order to survive. Whilst most consumers understand what the economic term 'inflation' means, they're still a little bitter when things suddenly become more expensive.

Human beings are habitual creatures that follow patterns. If an item we purchase regularly has cost a specific amount for a long period of time, we get used to that amount being its value. Most of us know what a loaf of bread or bottle of milk should cost because it's something we purchase quite often.

With that in mind, it should come as no surprise to business owners when customers do not respond favourably to significant price increases on items they frequently consume.

I work in the city and there are three places where I buy my daily coffee from. I recently visited the shop closest to my office, and as I got to the counter I saw a sign by the cash register that said "New Coffee Prices".

It turned out that my regular Skinny Cap had increased by 17%, which may not sound like a lot, but it's quite a jump on an item that I purchase once or twice every day.

I will probably never buy another coffee from this shop again.

My reasons are as follows:

1) The product (coffee) isn't unique and there are at least a dozen cheaper alternatives close by that are of the same quality.

2) This particular shop went from being the least expensive to the most expensive over night. A subtle price increase on my coffee would have kept this establishment as an option for me due its convenient location - but such a big spike just leaves a bad taste in my mouth.

3) The global price of coffee is the lowest it has been in 2 years, if anything they should be charging me less!

4) As a loyal customer, all I got was a sign that the prices had gone up with no explanation. You may be thinking that I'm not entitled to one - which is true - but if there was a valid reason, I would be more understanding and may continue to give the owner my business.

Warren Buffett famously said: "If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you've got a terrible business."

The impact of a sudden price change is something many businesses seem to underestimate. I believe that far too many business owners don't put enough thought into the impact of this decision.

If price increases are not complimented by changes to the product or service provided, many customers will become disgruntled - especially regulars who feel like their loyalty counts for something. If, however, there are new additions or benefits as a result of the price spike, the impact will be much less significant.

I think the key for business owners is to try create a perceived greater value in conjunction with the price spike. While some customers focus on price alone, most consider a balance of value and price. If an enterprise can show they're offering greater value, most of its consumers will swallow the increase.

Customers tend to assume they get a better deal when products or services are bundled together, even when they can't actually determine the cost of the individual items in that bundle. Creating a package with a complementary product or service, can allow business owners to raise the price on some of the individual items in that deal. Fast food chains seem to do this very well.

In the case of my local coffee shop above, if the owner incorporated his new prices with some kind of value deal with either toast or yoghurt, I may not have let my feet do the talking quite so quickly.

Sometimes business owners feel as though they have to raise their prices because their operating costs have increased - and that makes perfect sense to me. There is little doubt that profit margins are going to take a hit if rents increase or if new equipment is required. In this situation I feel business owners just need to be transparent with their regular customers and explain why they have to increase the price.

When there is no transparency, customers will take the default setting that they are being ripped off - and I haven't met one person on this planet who likes being ripped off.

So to all you business owners out there, if your prices are going up, just communicate with us properly and there is a good chance we will stay.

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