Of everything that we can do to boost our bottom lines, raising prices tops the list. The book Price Yourself Right references two different studies that confirm this. In both studies, different changes—price increases, supplier expense decreases, and overhead controls—were tested to see which had the greatest impact on the bottom line, and price increases won. So not only do we need to increase to stay on top of inflation, we need increases to build our bottom line. But how can we do this so that it is a natural part of our business practice? Here are five tips to help.
Price increases start with understanding value: understanding the value to the customer, and knowing what our value is compared to our competitors.
For example, a number of years ago I researched my industry’s pricing for similar services through a trade association guide, even down to the region. By doing this I realized that I was underpricing and it got me to thinking about how I could increase my prices.
Have Confidence In Your Own Value
But I also find that it is important to have confidence in the value of one’s product or service. How many of us have, at one time or another, had a little doubter sitting on our shoulder saying “If you raise prices, all of your customers will run to the competition?” One way to help beat back that doubter is to have confidence by knowing our value—value validated by our market research and by internalizing the benefits we provide our customers. Questions to ask yourself are:
- What is the competition charging?
- How much am I saving my customer?
- How much am I allowing them to grow?
- What have my customers told me about the benefit I provide them?
One technique that helps us with our prices is that we can test prices, especially when it comes to introducing new products. So how do we do that? Well, our market research will help by giving us a price range on comparable products and services—sort of the “science” side of pricing. But then there’s the “art” side of pricing, which is figuring out what really works. To test, we first establish the baseline price for the product that we put in our promotional materials. But then we add discounts, such as an introductory discount, short term sale, or volume pricing, to see what the reaction is to these prices.
If you are selling or promoting products on the web you have an additional tool using split testing, in which case you can tell your software to present one pool of visitors to see a price at 10% off while another group would see your target price.
Another thing that we do, in service businesses especially, is “step pricing” whereby every new group of customers is charged a new rate.
For example, a graphic designer has been charging $100 an hour for the last few years, is contemplating a price increase, but is concerned about losing her current client roster of 30 clients. Rather than increasing the prices for them, she charges the next 10 clients $125 an hour. After solidifying the relationship with the new group, she sends an e-mail to the initial 30 clients, explaining that it has been a while since she increased prices (true), the value of her services has increased (she did her research!), and in a month her rate will be $125 an hour (not springing a surprise on anyone).
Let’s say that she loses three of her old clients in the process. Well, she started out with 30 clients at $100 an hour, but now she has 37 clients paying her $125 an hour. More clients, higher prices… sounds great, doesn’t it? And she did it with minimal risk and honored her relationships by explaining why she was raising her prices.
Have a Pricing Policy
Finally, it is very beneficial to set customers’ expectations with a pricing policy that explains when prices are raised and by how much. Price increases typically take place within a given time period but sometimes are triggered by events, such as the increase in underlying costs. And while you might not be able to specify the rate increase in advance, just conveying typical amounts help.
A simple pricing policy might sound like this: “I review my prices every year against what inflation is, against what my peers are charging, against the value that I am giving to you and typically prices have gone up 5%.”
By establishing the policy up front the client already expects price increases, can estimate what to expect and when to expect it.
One final note about price increases that I think we sometimes forget: Regardless of whether we sell products or services, we are in business to help others. If we don’t take care of ourselves by taking care of our business, how can we help others? So it really is in the best interest of our customers to have an equitable pricing structure that compensates us at least the value. And if we charge more, all the better, because that means that we can dedicate even more of our team’s time and energy to helping our clients even more.
If you haven’t raised your prices in a while, grab a pad and head out to your favorite café for a couple of hours and put these tips to work for you. It might be the best thing you’ve done for your business in 2016!