In a survey of members, you said that your fourth biggest challenge is:
“I would like to increase my prices, in fact I know that I probably should, but I have no idea how without all of my customers leaving”
This is an excellent topic and a much overlooked subject: you can find a huge number of business books on marketing and sales, including negotiation, but very little on setting prices for maximum profit and indeed increasing pricing effectively.
So let me answer this question. Firstly, I will begin with a very important note: you should only contemplate increasing prices if you can justify this in both ethical and business respects.
Most businesses undervalue their time, expertise and resources in the shape of the services or products that they provide; in addition to often charging less than their comparable competition.
If this sounds like you, then you can justify increased pricing. However, if you cannot honestly answer this question positively, then think again. This article is not an instruction to ‘rip off’ or ‘milk’ customers for a quick buck; but an approach that you can implement so that you can charge prices that are fair and deserved and that reflect the value that you add to your customers.
So with that rider accepted, there are three main steps in the process to increased pricing. They are:
1. Adopt a different mindset (so you’re prepared to increase prices)
2. Add more value (so that you can justify a price increase)
3. Implement a planned strategy (so that you have the tools to increase prices)
We will address the first question today and in the forthcoming articles look at points two and three.
So what are you waiting for: just ‘put up your prices’! It’s easily done, isn’t it? On a theoretical level, along with cost cutting, a price increase is the easiest way to grow business profits. Using the example of a typical business with a profit margin of 25%, a 25% increase in price will result in a doubling of profitability.
Not convinced? I guess you’re probably thinking that you can’t because you have price sensitive customers who will not tolerate price increases.
However, is this the ‘right’ way to look at this situation? I think not. In reality, there are those customers who are price sensitive and those who are not. In every industry – from the significant purchase of a car to a disposable cup of coffee – there are different price positions.
In respect of car purchases, it’s true that some people buy a car for a few hundred pounds and other people buy a car for one hundred thousand pounds. Ask yourself which customer would you like to have; the one looking to spend a few hundred pounds or the one looking to spend one hundred thousand pounds?
Obviously it’s the higher spender. This is relevant to every business leader, as you actually have the choice as to the type of customers you do business with. For example, during the worst years of economic crisis and recession (post the 08 crash), Bentley Motors reported a 37% increase in sales. That’s for a brand whose prices start at over £13,000. In one single month recently, over 140 million pounds were spent on Bentley cars.
This happened because Bentley understands the choice between high and low spending customers. Accordingly, Bentley does not focus on price sensitive customers, allowing the leadership to focus not on price, but on value. This way Bentley can dedicate their efforts to producing the best vehicles, service and experience possible because their customers value this and not the price.
This is a very welcome outcome. By focusing on a different type of customer – a more discerning customer – a business can not only charge higher prices, but is free to produce the best possible quality and service. This is significantly more favourable than constantly making economies for price sensitive and demanding customers who do not value quality.
Of course, this is much more than simply increasing prices; it requires a shift in focus to a business that produces maximum quality and value. This affords a perfect partnership: the customer receives valuable services of the highest quality and the business is free to deliver the best possible outcome and not the cheapest possible outcome.
Yet whenever I present this theory to business leaders, I am met with the objection that not every business can produce legendary and historically high-priced cars. Indeed many businesses operate in commoditised industries far removed from the luxury car market.
Commodities such as cups of coffee. At the time of writing, following successful pilots, coffee shop chain Starbucks announced further price rises. This is a classic commodity market. On the surface, Starbucks sell cups of coffee and generally wherever you find a Starbucks you also have several other coffee shops to choose from. They trade in a common, everyday item, in a very competitive market; yet they have announced a price rise.
Why you may ask? Because, just like the Bentley leadership, Starbucks know that their customers buy based on value and not simply price. Starbucks actually sell so much more than just a cup of coffee – they sell the Starbucks Experience. Starbucks believe that this experience is worth paying more for; and their customers agree with them and happily do so.
While the industries are very different, the theory is the same; a business model that focuses on value over price. I consider this to be significantly better than the alternative of focusing on a low price, because this inevitably results in a price war.
In every respect, a price war is the worst possible outcome for a business as there will almost always be a business prepared to discount further than the existing lowest price point. In reality, no business wins a price war. The winners are those businesses that focus on delivering the highest possible value and charging a higher price for this.
This should be your business. Then when I propose a strategy to significantly increase prices, and maybe even double profitability, you don’t need to worry about price sensitive customers. You worry about customers who appreciate value. Then we can ADD MORE VALUE – the next step in the process – and increase prices.
That’s enough for now… more next week!