n this section we will outline why you should increase prices.
We will show you how increasing prices is the fastest way to increase profits of many business, show you why you must increased rices to stay in business and get the reward you deserve for being an entrepreneur.
Fastest Way to Increase Profit
Increasing prices may be the fastest possible to way to change you business, it increases turnover and profits with the least amount of effort.
To bring this home lets make it of a quick example
Imagine a business that sells 100 products a week, the price of each product os €600 and the profit is €200.
Lets increase the prices by 10%, so the price is now €660.
The profit per item is now €260, you have increase the profit by €60
But the import point here is the impact on profit, it is not 10% it is 30%. So, in this case a 10% price increase equate to a 30% increase in profit.
If sales stay the same the total profit increases from €20,000 to €26,000. In order to make is this addition profit from increased sales sales would need to go up by 30%. So 10% increase in price has the same impact as a 30% increase in sales.
But what if you lose customers from the the price increase?
A 20% drop in orders, the profit is still €20,800 . €800 more than the original profit of 20,000 , still 4% more profit despite a drop of 20% inc customer.
In fact the is no negative impact on this example until the priced the number of orders drops to 77. So a 23% customer in orders is required before you would see any lost profit.
So in his example we have shown that 10% increase on prices leads 30% increase in profits. Profits are still higher until a drop of 23% in sales is required.
Increasing prices is the fastest way to put real profit into you business and often still adds profit been if it leads to the lose of some customer.
To Make Enough Margin Stay in Business
One of the most common reasons businesses fail is an eroding profit margin. They are simply not making enough money to meet all of the costs associated with the business.
When prices are initially set they they are often decided on arbitrarily, by adding a markup on costs, comparing to competitors prices or just on a view of what the customer will pay. But, As time passes these margins are eroded as costs increase and are absorbed by the business.
Because the cost increases are not passed on to the customer, the business stops making enough profit and ends up surviving on cashflow, effectively funded by their creditors until it runs out of runway.
A correct pricing strategy which insures you achieve an appropriate margin for you product is essential to you staying in business.
A Fair Reward for the Value you Create
By providing a service or product you are helping your customers get what they want and providing your staff with jobs and opportunity.
You are an entrepreneur taking on risk, taxes, rates and providing employment. For this contribution to you are entitled to a fair reward.
Correctly pricing you services so that you gain a share of the value create will ensure you can continue servicing your customers, paying taxes and provide employment and opportunity to your staff,
Despite the logic of increasing prices many business owners are still still nervous about increasing prices. Let confronter this and look at some ideas and insight that will help you overcome this barrier.
## Prices Go up All the Time
The reality of modern life is that prices go up all the time
Fuel prices, rent and food prices to name just a few increase on a regular basis.
Prices are not static they are point in time an changeable. it is very likely your competitors are increasing the price or are at least considering it. When you fail to increase prices it may well be more difficult for in the future as customer expect young to increase prices because you haven’t in the past,
## Many Customer won’t notice
For many product Many people don’t know what price something should be, they may have expectations or assumptions based on reference prices but if your prices is within a reasonable range and meets their higher level decision criteria, often they will not notice.
## Price is Just one Factor in the Customer Decision Making Process
Psychological research into how customer decides on products whose that of the for major element considered price is that last
When people consider a product or service they are looking for a problem to be solved or for an experience. Price is just one of the criteria they use to make their decision, otherwise people would cut their own hair, make their own clothes and never eat in restaurants.
The Customer buying hierarchy models developed by Windermere associates helps us understand the decision process. When customer are choosing between different predicts they evaluate using the four key criteria below.
Functionality : Does the product accomplish do what hey need it to do
Reliability: How reliable is the product and the supplier
Convenience : How easy is it to obtain and use
Cost: How much will it cost to get started and what is the total cost
According to this model, to decide on the value of a product or service the customer takes a wide range of criteria into consideration. They first look for something meet their function al needs the most, then they consider the risks they are taking followed by how easy it is to do business and finally the cost.
## Competing on Price is a Race to the Bottom
Competing on Price alone can be a very poor business strategy.
If the customer only has price to compare on then they will of course pick the cheapest.
This can lead to a race to the bottom as struggling companies cut their prices in desperate attempt to attract customers or new companies offer discounts to attract new customers.
Eventually many of these companies will go out of business, but not before they have caused significant damage.
When you compete on price alone you are accepting you product or service is a commodity, there is no difference other than price.
When this happens you lose control of the faith of your business as the decision is totally in the hands of the customer and a competitor who decides to undercut the market.
The only longterm solid basis for competing on price successfully is the ability to deliver the product to the customer at less cost to you then your competitors. This type of advantage usually comes from access to limited resources, unique protected methods production or distribution or other innovations. This is a viable strategy but in itself ,ay requires a lot of work and initial investment.
# How to increase Prices
When setting prices it is important to Set the them line with you overall business objectives
You may use some products to attract customer so may keep the prices close to your competitors where other products may be ‘profit maximisers’ higher margin or price point product which maximise your overall profit on the customer sale.
So you must first understand the role of the product in your equation, you considers this in the context of you customers need and wants and you competitors position.
## Understand Customers and Needs and Wants
The first step in setting a price is to understanding what it is that your customer wants from your products.
One way to do this is to examine your customer needs using the buying hierarchy:
### Functional
What specific functional features do they value, if its a restaurant it may be a unique menu or type of food, for an accountant the provision of Detailed Financial Analysis for for a training business it may include providing recording of lectures. If you don’t meet you customer functional needs that won’t but the product, so make sure to understand them.
### Reliability
In this category customer may value the brand of the business, it’s reputation, history and customer reviews . Other consideration include Guarantees, after-care service, customer reviews and testimonies.
### Convenience
Convenience considers how easy you busy is to find and to do business with.
An obvious example is i location, many people willing pay more for basic groceries in a local convenience store rather than travel to a cheaper supermarket.
Amazon is one of the best examples of convenience as a factor they facilitate Huge choice, home delivery along with 1-click ordering.
Convenience may also included flexible payment terms, and less search effort required by the customer because of advertising or positive word of mouth.
### Price
When a customer finds that a number of products meet their needs in functional, reliability and convenience then price becomes the deciding factor.
Each of these factors may impact the perceived value of the customer so by understanding them you can make sure you factor them into your Pricing
## Target Specific Customer Segments
Not all customers are the same, different customer will value different aspects of a service. When eating out some people are happy eating in a local restaurant while others may want to eat in a recognised fine dining restaurant.
When picking an Accountant some people may simply want the cheapest while other will value this who have specific expertise such as Tax Planning or Inheritance stateless or are experts in a specific industry.
Different aspects of similar products or services will appeal to different type of customer, by tailoring you products or service to the needs to specific segments you can create a unique attraction which can impact the price you charge.
## Understand Your Competitors Position
The next step is to understand your competitors again you should know they pricing but also how they meet they address factors that are are important to the customer.
This approach can allow you spot opportunities to performa better. For example the you may realise that convenience is an important consideration for customers and use this information to become more convenient for the customer. If this is really important to the customer they may be willing to pay a premium to you for your extra service
Once you have a clear view of your customers needs, your competitors position you can set price. You must obviously include costs heres and then set the prices based on the value you create of the customer. The more you can deliver value to the customer across all the factors that are important to theme the more you can charge.
# Pricing Increase Methods
There are three main ways to increase your prices, they are “Just do it“, Incremental Increase and Price Testing.
## Just Do It
“Just Do It” simply means increase your prices, for example, simply add 10% to your fees or costs, you could do this on certain products or across the board.
Often customers won’t notice or if they do, the increase won’t be enough to impact their purchase decision. They may grumble, it’s natural, none of us like price increases, but when they consider the overall value they may simply accept the increase because of the cost of changing to an alternative.
You may lose some customers when you do this, but still increase overall profits, They key here is ensuring you understand how you create unique value for you customers and ensuring they appreciate it.
## Incremental
Another approach to increasing fees is to do so in small, regular increments. We all experience incremental increases, be it through food prices, bills, mortgage rates and income taxes and again we just accept them as the normal course of events.
In this case prices are increase in smaller amounts, perhaps 1-5% on a regular basis. The advantage of this approach is that it is often not noticed. **It ‘trains’ your customers to accept the prices as the normal course of business and likely not be enough to cause a customer to taken the additional effort, costs and risk to change.
With incremental efforts you can continue to raise prices while constantly assessing the impact and if you do reach a price resistant, were the cost losses outweigh the benefits, you can pull back and develop a new strategy.
Incremental Price increases can also be implement by reducing the quantity of product or level of service while keeping the price static, a good example of this is the Yorkie bar which has shrank from 70g a bar for 40g over the last 15 years.
Incremental increases in price can be achieved by small increased or recasting ins the product or service,
##Price Testing
The price testing approach allows you assess the impact of pricing on customers. You could simply trial price increases for a period of time, to different segments of customers or in different locations. The impact on customer’s sales and margins can then be assessed and a final decision made.
# Making Your New Price Stick
The third step in increasing prices is making it stick.
There are a number of things you can do to ensure your price increases are accepted by your customers, resulting in growth for your business.
## Explain Why
Create and communicate a clear reason why you are increasing the prices. Make sure your clients understand the pressures and challenges you must deal with and how hard you work to serve them.
Show that in order to continue to serve them, you must also benefit from the exchange, and ensure they understand that if you are not in business, they won’t continue to receive the value you provide.
If, despite this, they are still unwilling to support a price increase, you may well have learned a very valuable business lesson, the customers you are serving would rather let you go out of business rather than increase your prices, you can then ask yourself is this the customer base you want to serve.
## Improve and Differentiate the overall package
As we have already discussed, when customer assess value, price is just one of the factors along with other elements such as service, environment, flexibility, speed, aftercare service and guarantees. By systematically improving these elements you can increase the perceived value and justify price increases.
To command higher prices, your business must stand out in some way that a sizeable segment of the customer base will value.
By understanding what your customers value, you can target these areas for improvement and separate yourself from the pack, avoiding direct price comparisons, and set your prices accordingly.
##Staff Training
By ensuring your staff are trained properly in delivering and communicating the value of your product or service, you can help customers accept increase. This could include training staff to highlight your core differentiation, as well as preparing them for pricing queries and negotiation tactics.
#Price Increase Examples
Lets looks at a couple of examples in price increase
### High Quality Restaurant
We suggested to one go our clients, a high quality restaurant, that their entry level wines were priced too low and suggested a 10% increase. Initially, the owner was resistant, as they wanted to provide a very good entry price to their customer.
While being impressed by their concern for their customers, we pointed out that a lower quality wine in a local indian restaurant was more expensive and that the owner was simply using standard mark up when pricing the wine and not valuing the overall experience they provided.
The prices were increased with no impact, buoyed up by their experience, the owner soon increase overall prices by a 10%. The restaurant continues to be full and the owner now reaps the reward for their hard work, innovation and risk.
##Accountant
Working with an accountant that provided high quality services to small and medium size businesses, we considered their minimum monthly retainer for services as being too low and suggested a 30% increase.
The accountant was concerned that they would lose some existing customers, as well as losing out on proposal to potential new customers.
To fully understand the impact we asked them to identify the specific type of customer they felt they were likely to lose. From this analysis they discovered that in general they were troublesome customers, who often failed to meet filing requirements, resulting in more support requirements, leading to a loss on the account.
The fee was increased and inflow of new customers remained consistent and in fact no customers left.
The Accountant is now considering an additional fee for customers who do not meet agreed filing dates.
Many business fail to receive the best price for the products and services they provide.
This can be due to poor pricing strategy and/or failing to increase prices along with costs and value created.
By raising your prices, you can ensure that you stay in business, rewarding you and your employees for the value you have created while allowing you to invest in building your business to create even more value.
Price is that last thing a customer considers when deciding to purchase. By separating yourself from your competitors by appealing to a certain segment of customer differently in the area of functionality, reliability and convenience you can charge higher prices.
The three Ways to increase prices are ‘just do it’, incrementally and price testing.
You can make prices stick by explaining why, training staff and increasing the overall value provided. You may lose clients but no business can serve all clients and clients who do leave can often be the most difficult and expensive to serve.
Ultimately you must remember, business is about value exchange. Competing on price is very difficult and the prices you can charge are based on your unique differences and the value you create.
To Get the Best Prices you must have a unique advantage, deliver a high degree of value and value yourself and staff.
So let gets started
Increase a price today, just pick one price and introduce
Look for ways you are already delivering more value than your competitors and set the price to reflect
Target specific subsets of customers who are happy to pay for higher levels of functionality, reliability of convenience, add these features to you product and price them in
You an in business to make money so lets get started
Please let us know how you about you success, if you gave any questions or would just like a chat drop me a mail on pcumiskey@customerboomerang.com
Go make more money !