The Green Sheet Online Edition
September 09, 2013 • Issue 13:09:01
Let's talk price
As the cost of doing business goes up, we sometimes have to pass price increases on to our merchants. How do we deliver that message without hurting our credibility or losing customers?
For Kusum L. Ailawadi, a marketing professor at Dartmouth College, and Paul W. Farris, a communications professor at the University of Virginia, there are no easy answers. Their Wall Street Journal article, "How Companies Can Get Smart About Raising Prices," takes aim at common missteps – such as sacrificing quality and having clearance sales – made by companies in an effort to downplay rising prices.
"Passing along costs while keeping customers happy is a tough balancing act – but it can be done," they wrote. "Companies should resist the urge to cut promotions or camouflage price increases, which often backfire.
"Instead, they should focus on minimizing the pain for shoppers who are most sensitive to price increase, by targeting discounts at them and offering different versions of their product at different price levels."
Ailawadi and Farris recommend proactively managing prices instead of waiting for something to blow up. Following are six guidelines for creating smooth transitions within evolving pricing structures in order to maintain consistent, steady portfolio growth.
1. Maintain transparency
Full price disclosure can boost consumer confidence. "Research shows that consumers respond not just to price level but to how fair they think it is," Ailawadi and Farris wrote. "If they think that a price increase is tied to profit-taking or to other hidden motives, they'll consider it unfair. They are more likely to accept the increase if it's tied to higher costs, such as a fuel-price surcharge."
GS Online MLS Forum member CCGuy concurred, stating, "Today, most of our clients are on cost-plus, so if interchange goes up or down, it is all on the merchant."
He noted the increasing trend toward transparency among merchant acquirers: "Margin compression is why many companies have hybrid interchange tables and a few points added in here and there – along with [Durbin] not being passed through – I have seen everything from .07 basis points to .50 to .55 and even .75."
2. Be in sync with your market
Timing is critical to pricing strategies. Ailawadi and Farris recommend aligning price increases with new product announcements since most customers expect to pay more for new, improved products and services. They also suggest keeping a close eye on your competition.
"The market leader should lead at the appropriate time and give rivals a chance to raise their own prices and follow along," the authors wrote. "Following in the wake of an industry trend toward price increases represents the best chance for smaller companies to follow suit and recover margins by raising prices."
This view was supported by AdamVetter, who wrote, "Usually, a price increase must be accompanied by some additional service that at least partly offsets the anger regarding the increase.
"So, just as a hypothetical, if a POS company was forced to [implement] a new monthly fee outside of the processor's normal fees, it would make sense for that POS to also announce that they're going to provide users with in-house customer service, or some functionality on the POS that was previously unavailable, or only available in a more highly priced package."
3. Treat price as a nonevent
Obviously, it's best not to sound alarms when announcing price increases or to draw too much attention to what may only be a relatively minor mark-up in a product or service.
"Price increases are a touchy subject," Mbruno wrote. "[D]o you leave it at just the statement message or make a point to contact the merchant base or somewhere in between? I wish I had the magic bullet on this, but each increase is different.
"As mentioned, straight IC [interchange] increases are difficult to justify to some non-IC merchants because there's no real additional 'value' and it can look like you are just pulling a money grab – especially if that merchant just happened to board with you a few months prior to an IC hike. When an ISO forces a fee change (i.e. noncompliance fees, reg bundle, etc.), that too can provide a difficult spot, as there may or may not be any value there either."
Regarding interchange increases for tiered merchants, Mbruno added, "I leave sleeping dogs lie when possible. I used to notify all merchants but no more.
"Aside from not having the time, it often created problems where they probably wouldn't have existed before. I noticed when I stopped calling them to talk about the rate increase, I didn't get a lot of people calling to complain.
"For the ones that call, there is either another issue they are really complaining about, or it's easy to push off ('Oh there goes Visa/MC again with their rate increases – I'm really sorry we had to bump your nonqualified rate that 0.01 percent – but in the grand scheme, it's not a lot').
"Of course, there are those where the small increases are still 'too much' – in those cases, I'm glad I have the control to lower their rates."
4. Unbundle products and services
Many of us have become accustomed to pricing bundles in the form of tiered bank card rates, or various silver, bronze and gold packages that are right-sized for merchants with varying transaction volumes and requirements.
Sometimes it pays to unbundle these services and let merchants select the add-on products and services they want and for which they'd willingly pay more.
"For instance, companies might take their core product, remove the bells and whistles and lower the price," wrote Ailawadi and Farris. "Call that the 'good' version. Then they might add a pricier 'better' version that has extras and a 'best' option fully loaded with features at an even higher price."
5. Super-size bundles for a total experience
Naturally, we've all gradually accumulated our own internalized pricing models for what we have come to expect certain things to cost. Ailawadi and Farris call this our "reference price."
"[Consumers] judge the value of a product based on the difference between what is being charged and the reference price in their head," they wrote. "One way to boost that reference price: put together a package of goods.
"Let's say a company makes skin-care and beauty products. It can put a bunch of those items into the same box, call it a 'home spa package' and sell it at a premium. The idea is to get customers to compare the price to a day at a spa – the reference price for the product goes up, in comparison to which the package is a much better deal."
Many integrated POS systems marketed today have taken this approach, positioned as an inventory-management-in-a-box to small business owners, with a payment component embedded in a comprehensive package.
6. Take incremental steps, not giant leaps
The key to crafting any pricing strategy is to create a flexible, scalable model that systematically reviews and revises pricing over time to maintain equilibrium across an enterprise.
Mbruno recommended taking a defensive stance in the beginning of a new merchant relationship to protect margins and leave room for price increases. "[Another] method to handle price increases is to spread margin around the account from the beginning," he wrote. "With multiple revenue sources, you can more easily 'eat' one cost in exchange for revenue on another."
Overnight changes to pricing models such as monthly price increases of $25 or $35 per merchant can sometimes backfire, as Klinckphilip has seen at several ISOs. He wrote, "The increases I have always had issues with, and immediately, were when the ISO decided to charge a $25 fee this month for whatever; or added a monthly minimum in for everyone; or $9.99 IRS fee; or $229 annual PCI fee plus monthly PCI noncompliance fees; etc.
"Five bps [basis points] here or 1 cent there. No one notices too much until three or four years later when an agent comes in and says they can save them 20 to 30 bps, which is probably the amount of the increases over the years."
Kudos to TPSS//TIGER for reminding us that after all is said and done, ours is still a service business. "The key is to listen to the merchant, and they will tell you how to proceed," he wrote. He added that whether you're using a push mower or a riding mower, you still have to cut the grass every week, so roll up your sleeves and adapt to whatever changes are occurring.
Dale S. Laszig is a writer and payments industry executive specializing in business development and sales performance improvement. She manages channel sales at Castles Technology and sales effectiveness programs through IMPAX Corp. and C3ET Credit Card Consortia for Education & Training Inc. She can be reached at 973-930-0331 or firstname.lastname@example.org.
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