A Price Increase that Backfires

I just got off the phone with a company that provides me a service for which I pay $600 each month.

A couple of days ago I received a letter from them saying that due to economic factors, cost increases, blah, blah, blah they were going to raise my rate by a "modest amount".

Ok, so what do they consider a modest amount? I called them and found out that to them a modest amount was 8-10%; they weren't sure yet.

I don't know if their definition of a "modest amount" struck me wrong or if I was just against paying more for this service, but I took the time to look in the phone book and find two of their direct competitors.

I called each competitor and got price quotes on the exact same service.

As you probably can guess, I found some lower prices (without even mentioning what I was currently paying). And it turned out that both of the competitors were priced about the same.

I then called my current provider and mentioned that their competitors would give me a price of $500 for the same service; $100 less! They said that they would research it and call me back.

I got a call a few hours later saying they wanted to keep my business and would be happy to match their competitor's price. I gave myself a pat on the back.

But I started thinking about how my current provider intended to raise my monthly rate by about $50 but ended up cutting their rate by $100. So rather than creating an additional $600 of cash for themselves next year, they are now going to take $1,200 less.

I can't believe that would have been considered a good risk by anyone. So where did they mess up?

By not doing their homework.

They did not take the time to compare my current rates with the rates offered by their competitors. If they had (and I am assuming they didn't because I can't believe they would take this risk), they would not have sent me the letter about increasing my rate.

The letter led me to call them to find out the actual amount of the increase. The significant (to me) price increase led me to call their competitors.

Before the letter I was content to pay their fee. I hadn't planned on checking prices and making comparisons. But when they brought the subject of fees up, I took the initiative and ended up with a much better deal.

Maybe they were counting on most of their customers to roll over and accept it. But I wonder how many will now renegotiate their fees since the subject has come up.

They obviously have different customers on different fee schedules. So why wouldn't they take the time to determine which customers should have their fees increased and which should be left "overlooked" this year.

Customers who were paying close attention to their competitors fees would probably accept their "modest" price increase because of the hassle (read: barrier) of switching to a competitor. Even if they did a price comparison a small increase is usually not worth the trouble.

I guess the moral of the story is that before you bring up the subject of increased fees, make sure you know your customers' alternatives.

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© Simple Joe, Inc.
David Berky is president of Simple Joe, Inc. a marketing company that sells simple software under the brand name of Simple Joe. One of Simple Joe's best selling products is Simple Joe's Money Tools - a collection of 14 personal finance and investment calculators. This article may be freely distributed so long as the copyright, author's information and an active link (where possible) are included.