Haslam College of Business - UT Haslam Researcher Finds Messaging Matters in Price Increase Notifications

The email is familiar. “Thank you for being a loyal customer. To continue the great service you enjoy, we are increasing your price.”

Laws in the U.S., Canada and Europe require companies to notify customers before increasing prices during the term of a contract, making the notifications compulsory across industries, from music streaming to subscription pest control. For organizations operating under contract with consumers, one significant question arises: How can they justify a price increase in these notifications in a way that reduces customer backlash and attrition?

Hoorsana Damavandi, an assistant professor in the Department of Marketing at the University of Tennessee, Knoxville, Haslam College of Business, set out to answer this question. Damavandi and her coauthors collaborated with a Canadian storage company to understand how price increase justifications affect customer attrition, finding that the type of reason conveyed significantly affects whether businesses will lose or maintain customers.¹

A Question of Justifications

In their research, Damavandi and her colleagues focused on three types of justifications in messaging: quality, cost and market.

Quality justification in price increase notifications explain that customers will pay more because they will get more. For the storage company, examples of quality increases included new security cameras and upgraded website and smartphone capabilities.

Cost messaging emphasizes passing increased business operation costs (e.g., labor, supplies) on to customers, a frequent explanation in times of inflation.

Market justification is rarer. It is an upfront message conveying that businesses are raising prices because they can, whether that be from decreased competition or increased demand.

“If demand goes up or your competitors shut down, you can set the price for the market,” explains Damavandi. “You’re going out there and saying, ‘This is why I can set the price, and I’m doing it.’”

Damavandi and her fellow researchers found a wealth of economics and marketing literature that concluded consumers react negatively to such market-based messaging. However, those studies employed scenarios to assess hypothetical customer exit intentions, not real attrition behavior.

“No one had conducted a study in the field with a real firm and real price increases,” Damavandi says. “Our goal was to see if market justification is as bad as everybody says it is. It’s not fair; that has been established. We wanted to see, however, if people would accept the justification and remain with the provider.”

The Power of Market Messaging

To answer their central question, the researchers ran a 10-month field experiment with 1,600 self-storage customers receiving notifications about price increases.

Participants were assigned to one of 15 experimental conditions that varied three factors: the size of the price increase (5 percent or 15 percent), the type of explanation provided (cost, quality, market or no justification; while the justification conveyed varied, all were accurate) and the level of detail in the explanation (specific and concrete versus vague and general). This design allowed the scholars to isolate which combinations most effectively influenced customer reactions to price increases, measuring outcomes as the time between notification and when customers reacted by terminating their contract.

The results showed that quality and cost messages were not effective in driving customer retention, and on average, were on par with providing no justification at all.

Contrary to the previous literatures’ findings, compared to the no-justification baseline, market justification reduced attrition by 29.5 percent, regardless of the level of concreteness or specificity in the messaging. For market justification, some customers received vague messages that explained there were fewer self-storage options, while the more concrete increase notifications directly explained that the business had more customers and less competition.

The researchers theorize that market-based justifications helped the company contain attrition because of the onus it placed on the customer: They were confronted with the market reality of facing a scarcity of alternative options, so they were less likely to jump ship to another self-storage company.

While Alex Zablah, head of Haslam’s marketing department and the Gerber/Taylor Distinguished Professor, is impressed by the researchers’ findings, he highlights the study’s rigorous field-based approach and its ability to create valuable insights for businesses.

“What makes this work so valuable is that assistant professor Damavandi tested a long-held assumption where it matters, in the field, with a real company and real customers,” says Zablah. “It’s rare and difficult to run a field experiment of this scale, and the payoff is evidence that challenges what the literature has taken for granted for years. Just as important, her work gives businesses insight they can use right away, which is exactly the kind of real-world impact Haslam researchers strive for.”

Emphasizing Transparency

For businesses, the findings suggest that organizations may benefit from being more transparent about the market forces behind pricing decisions when those explanations are accurate.

Damavandi emphasizes that honesty is essential. Market-based messaging should only be used when it reflects reality, she explains, because misleading customers can erode trust and damage a company’s reputation.

“At the end of the day, customers are receiving the same price increase regardless of the explanation,” says Damavandi. “A truthful market justification may not make people happy about paying more, but it can help them understand why the increase is happening and save them the time and effort of searching for alternatives. Sometimes transparency is the better strategy for both businesses and their customers.”

¹“Cushioning the Blow: Reducing Customer Attrition in Response to Price Increase Notifications,” by Hoorsana Damavandi, Kersi D. Antia and Praveen K. Kopalle, will appear in the Journal of Marketing.

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CONTACT:

Leah McAmis, senior editor, [email protected]