A great example of a company having pricing power is unfolding before our eyes; enter Verizon. In the midst of a discounting battle among the other carriers, last week Verizon announced various price increases for its monthly plans. Despite having strong competition, Verizon enjoys the lowest churn rates of 0.96% in the industry and it's shown tremendous power in the area of customer retention - despite its steep prices.
There are four lessons we can learn from how Verizon went about its price increase:
Never Increase the Price for the Exact Same Offering
Hold on to Your High-end Customers
Charge Premium for Your Differentiation
Align Your Offer & Cost Structures with Your Customer Behavior
1. Never increase your prices for the exact same offering
Instead, add a feature or service with a relatively low cost structure. In Verizon’s case, they added more data and two new services. Carryover Data allows users to keep their unused data for a month, and Safety Mode prevents customers from the overage charges by reducing the internet speeds as they reach their caps. While both services add to its value proposition, the cost hike to Verizon is relatively insignificant as the additional data load is within its network capacity. Meanwhile, the Carryover Data service is a good competitive response to T-Mobile's Data Stash promotion.
2. Hold on tight to your high-value customers
Both add-on services, Carryover Data and Safety Mode, provide additional value to Verizon’s highest end customers, families, and moves them to even higher margins. Verizon’s price increase will apply to new customers only. Its existing customers will have the option to keep their current plans and data caps – which is another good practice when implementing price hikes.
3. Charge premium for your premium differentiation
The differentiated value can be defined as the additional value offered that surpasses the next best alternative. Verizon’s biggest differentiation is its network performance. The reliability and speed of its network are the top two reasons for its customers to stay with Verizon despite its higher prices.
4. Align your offer and cost structures with the customer behaviors
In Verizon’s case it’s unlikely that its customers, particularly families, will change their data usage significantly just because they have a bit more wiggle room to play. This makes it a great recipe for increasing their Average Revenue per User (ARPU) without largely impacting their churn rates, and while adding a smaller rate of increase to their cost structure. Win – win – win.
Warren Buffett once said he rates businesses on their ability to raise prices and sometimes doesn’t even consider the people in charge. He summed it up really well during an interview to the Financial Crisis Commission: “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.” We couldn’t have said it better, ourselves.
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