To build a profitable and sustainable business, you must understand the power of pricing and avoid the common pitfalls of the race to the bottom.

Business owners often set prices by looking at competitors and charging a similar amount, but this approach overlooks the fact that many of those businesses are struggling.

The decision to raise prices can feel terrifying, but it's a critical step toward creating a stronger business. Raising prices correctly creates a virtuous price cycle. Conversely, lowering prices or keeping them too low leads to a vicious price cycle.

The Vicious Price Cycle of Lowering Costs

Lowering prices might seem like a way to attract more customers, but it often backfires. When you decrease your prices:

• Your clients' emotional investment decreases. They may perceive your service as having less value, leading to a drop in their results.
• Clients become more demanding. The cheapest customers tend to require the most customer service.
• Your profit per customer shrinks. This leaves you with less money to reinvest in your business and improve your service, leading to a further decline in perceived value.
• Your sales team's conviction plummets. If you can't confidently deliver on your promises, your team will struggle to sell.

The Virtuous Price Cycle of Increasing Costs

Raising your prices, on the other hand, sets a powerful positive feedback loop in motion. When you increase your prices:

• Clients' emotional investment and perceived value increase. They are more invested in the outcome and less demanding.
• You increase your profit per customer. This allows you to reinvest that money back into the business, improving the customer experience, pampering clients, and creating better marketing.
• Your sales team's conviction grows. They become confident that they can deliver and even exceed what they promise.

How to Raise Your Prices Without Losing Customers

RAISE acronym provides a clear, step-by-step framework for communicating a price increase to existing customers.

• R: Remind them of the value they've already received. Start the communication by highlighting all the benefits they've gotten from your product or service since they became a customer. Personalize this as much as possible.
• A: Address the price change directly. Don't beat around the bush; get straight to the point. The rest of the letter will soften the news. A simple, single sentence can do the job.
• I: Invest in their future. Show them how the price increase will be used to enhance the product or service they love. You can talk about hiring better people, improving technology, or upgrading facilities. Frame these investments as a clear benefit to them.
• S: Soften the news with a loyalty reward. People respond better to a disappearing discount than a price increase. Offer loyal customers a temporary grace period at their old price—typically 3 to 6 months. This frames the price change as a reward for their loyalty.
• E: Explain away their concerns. In a P.S. statement at the end of the letter, let customers know you'll work with them if the price increase will materially affect their life or business. This personal touch shows you care and helps prevent negative comments on social media.

Example of a Price Raise Letter

Here is a template you can use, adapted from the playbook, to create your own price increase letter:

Dear [NAME],

Over the past [X] months/years, we’ve added so much value to [THE PRODUCT/SERVICE YOU USE]. We've [list of features and benefits].

For us to continue to invest in making [THE PRODUCT YOU USE] even better for you and the [YOUR COMPANY NAME] team, we need to increase our prices.

With these extra resources, we're going to:

• [Invest in something that provides more value to them, e.g., expand a popular feature]
• [Invest in something that addresses a pain point, e.g., make it faster or more reliable]
• [Invest in something they didn't know they wanted]

You've been incredibly loyal to [YOUR COMPANY NAME] during this time. As of today, we are raising prices for all new customers. However, because you are a valued customer, we are giving you a [e.g., $XXX credit] and will keep you on your existing plan for the next [3 to 6 months]. After that time, we'll bump you up to the new price of [new price].

Thank you for letting us be a part of your mission. If you have any questions, please let me know. All replies go directly to me.

[YOUR NAME]

P.S. If this will materially affect your business, please let me know, and we'll work something out.

Keep Crushing!
- Sales Guy