A few months ago, whenever I’d mention in a public event that my company was conducting academic research to determine the best way to communicate a price increase, I’d get a flurry of responses from folks eager to see the results. That research is now complete, and the results, taken together, reveal something critical about challenging the customer in your sales conversations: There is a proper time to provoke and challenge the customer, but it’s not when you’re trying to keep them or get them to pay more.
After conducting research revealing that challenging the customer backfires when it comes to securing renewals, we wanted to take a look at a different but related area of the customer lifecycle: price increases.
For the study, we collaborated with Dr. Nick Lee, a professor at the Warwick Business School in the U.K., to answer the following question: What is the best way to pass along a price increase to expand revenue while minimizing risk?
The study
The experiment was structured to assess three areas critical to the effectiveness and reception of a price increase message: attitudes, how likely a customer is to renew, and how likely they are to switch to a different vendor.
To begin, we recruited 503 participants to take part in an online experiment. At the outset of the study, participants were instructed to imagine they ran a small business and that two years ago, they needed to do something to improve employee satisfaction and retention rates because employee turnover was high and it was too expensive to keep hiring and training new people.
One of the steps these business owners took included signing up with a vendor who could help promote the company’s health and wellness program for employees. The hope was that increasing employee participation would increase employee satisfaction and reduce turnover. At the time, only 20 percent of employees subscribed to the health and wellness program. The goal was to increase that to 80 percent — the benchmark
for businesses with world-class employee retention rates.
The two-year contract the company signed was nearing its conclusion, and it was time to renew with that vendor or choose an alternative. But here’s the catch: the current vendor partner is now asking for a price increase for the next two-year agreement.
Here’s what the participants didn’t know: They were divided evenly into six groups and placed into different message conditions, each of which took a different approach to framing the price increase. Importantly, in each condition, the message opened by documenting the business results to date, and all of them proposed the same 4 percent rate increase to the annual cost of the program. The six approaches are summarized below:
- Introduce unconsidered need – This message introduced new research that revealed a new opt-out approach to increase plan participation, whereby the company would “flip” its current opt-in approach and all employees would be automatically enrolled.
- Improved capabilities with anchor – This message explained how new capabilities would add 8 percent to the annual cost of the plan. But the vendor agreed to reduce that by half because they are a valuable customer.
- Improved capabilities without anchor – This message was the same as the one above, except there was no “anchoring” of a higher price point to begin with.
- Improved capabilities with anchor and time-sensitive discount – Again, this introduced the improved capabilities in the same way and described how this will add 8 percent to the annual cost. But it then offered a time-sensitive discount that said if you renew before the end of the month, those additional costs will be reduced by 50 percent.
- Cite external cost factors – This message blamed the price increase on outside cost pressures, specifically regulations and responses that necessitate an 8 percent cost increase. This approach also used an anchor, explaining that the vendor is willing to absorb half of that extra cost burden, but must pass along the remaining four percent increase in annual program cost.
- Reinforce status quo bias – This message justified the price increase by reinforcing status quo bias — reminding customers about the potential risks of making a change, and about how much time and energy bringing in a new vendor could require.
The results
The experiment revealed that the provocation-based message that introduced an unconsidered need was the least effective in terms of framing a price increase.
The “challenging” provocative condition created these results:
- 18.8 percent less favorable attitudes
- 15.5 percent lower likelihood to renew
- 16.3 percent higher likelihood to switch to another vendor
The winning approach was significantly different in its messaging. It focused on reinforcing the customer’s status quo bias, not disrupting it. It also anchored high with a new price before offering a relevant loyalty discount.
Below is a compilation highlighting the best performing messages in the study:
• Document results: “You have made great progress on your goals over these last two years. You’ve seen health and wellness program participation grow from 20 percent to 50 percent. Your employee satisfaction scores are up, and you’ve said some employees have even taken the time to thank you for the changes you’ve made. In addition, your employee retention rates have started to improve, which you said was the ultimate goal of making these changes.”
• Reinforce status quo bias: “Over the last two years we’ve been developing new capabilities to drive more satisfied participants, as well as give you confidence that your program is keeping pace with anything else available in the market today. As you consider your renewal with us, we wanted to let you know about two new services we think can have a tremendous impact on your goals.”
• Introduce new capabilities: “The first is a new weekly report that shows non-participants in the program how much benefit those who are participating are seeing in terms of their fitness and wellness, as well as how much they are saving, and benefiting in terms of healthcare,
by being part of your plan versus the alternatives. This kind of communication on a monthly basis will provide
a gentle nudge to help encourage them to get into the program for the great benefits. Secondly, we’ve also added a new smartphone app with online tools, including automatic result tracking, and integration with popular fitness trackers.”
• Anchor price increase high, introduce loyalty discount: “The new services and functionality will add approximately 8 percent to the annual cost of your plan. However, if you renew before the end of the month, we will reduce the price increase by 50 percent, making it just a four percent overall increase to get this level of service. You’re making great progress. Stick with our program for another two years, and I know you’ll get to your 80 percent participation goal and further increase your employee retention rates.”
These findings validate that communicating with prospects and customers across the buying lifecycle isn’t a one-size-fits-all thing. While a disruptive message plays well when you’re trying to defeat the status quo bias and displace your prospect’s incumbent, it shouldn’t be applied universally — no matter how popular the approach might be.
