4 Cs to help Raise Your Prices Right Now!
Without Losing Customers
Pricing in many ways is the easiest method of increasing your profits, and yet many of us find it the hardest to address. A great way to maintain profits is by raising your prices at least once a year. I heard a great tip the other day – Raise prices on your birthday every year. That way you give yourself a nice present and reflect changes in costing, consumer knowledge and your value proposition.
Starting with the scariest part: rising prices = grumpy customers. You may get one or two grumbles, and even a few people who walk away, but the tough facts are you are in business to make a profit, and:
- If you raise your prices by 10% then 10% of your customers must leave you before the price hike becomes detrimental to your profit.
- If you raise your prices by 50% then HALF your customers need to leave you before it becomes detrimental to your bottom line.
- If you raise your prices by 2% most likely no-one will object (or even notice).
Remember you can choose who you want as customers. Are the ones who are most price sensitive, and leave as a result of a price hike, really the ones you want to keep, or are they the type of people who make your job un-enjoyable? If they are the latter perhaps it is best you let them go anyway.
Pricing well is a skill, and optimising your pricing almost an art-form
It is not difficult to build yourself a reasonable lift in your prices when you make sure you cover the Four Cs:
The 4 Cs for Raising Your Prices Now
Always have a very accurate understanding of what your costs are, and therefore how to price to protect your profits. Most likely your costs creep and move all the time – even something as simple as your electricity bill increasing is a cost creep. This is the primary reason you will need to hike your prices too. Here are several methods available to help you drill down from the big overall numbers in your P&L to the cost of each item produced – Pricing Products and Services
Remember that in the absence of an explanation for your price increase, your customers will invent their own. They may speculate that you’re greedy and taking advantage of them. If you take time to explain why you’ve increased prices, you’ll find that your customers will accept the change much more easily. Have you expanded staff or continued your commitment to improve quality? If your clients value your product and relationship they will support your decision to increase prices a tiny bit, because no-one else is offering is exactly the same as you are.
WARNING: Not applying any thought or effort to setting your prices is a simple way to go broke extra fast. ‘Pricing everything to sell’ irrespective of what it costs to produce and deliver in your business, will send you under! For more on this see – How to go broke fast!
The next factor for securing a price hike is to work out exactly how much people will pay for your product or service.
I could go on for hours about the economics of supply and demand curves and how lower price = higher demand, but I don’t necessarily always subscribe to this ‘old school’ approach – especially in relation to quality services and luxury items. Suffice to say Customers will try to get the lowest priced offering that meets all their wants and needs. The key here is that their WANTS and NEEDS may not be completely obvious so spend some time digging about to really understand what drives them to buy from you. It can be something as simple as “service with a smile” – an old cliché but true nevertheless.
One thing is for sure Customers both Want and Need to be informed of changes that impact them, so a warning the prices are rising is valuable for reducing fallout – “To be able to continue to bring you the fabulous products we know you have come to love, we are going to be charging slightly more from 1 July (provide details). We intend to minimise this impact on you as much as possible and look forward to your continued support. Should you have any questions please don’t hesitate to ask….”
Advance notice works in two excellent ways:
- Communicate the advance notice well and the customer feels appreciated and valued that you took the time to let them know about it.
- Secondly, they will often rush in with purchase orders before the price goes up! One online financial education company uses this price rise announcement method as their primary way of getting sales. They have found that many potential customers procrastinate for months wondering whether to buy their course or not. But as soon as they announce that the price is rising, a myriad of sales suddenly come in. Once they worked this out, the company made sure they announced a price rise 3 times a year.
The simplest, easiest, and therefore generally the least accurate pricing method, involves discovering what your competitors are doing and then setting your price to reflect theirs. This is a DANGEROUS APPROACH as it assumes your costs, and the return you need for your risks, are exactly the same as your competitors…. That is really, really unlikely!
Your business; your investment; your risk; your needs; therefore YOUR PRICE!
On the flip side, it is important to understand what your competitors offer for the price their customers pay. The right knowledge enables you to differentiate your value proposition – ideally you will work out a business model that enables you to deliver to your customers for slightly less cost, and at a slightly higher price than your competitors. This step is also important to prevent pricing yourself out of your market – only a very rare business that is able to have a similar offering, charge far more than the competition, AND stay in business for long.
It’s also a good idea to add more value to sweeten the price rise deal. Ideally your product or service is always improving so highlight any extra benefits that are now included; justify the price increase by adding features or providing some other type of added value. Instead of using a market driven approach to pricing, switch to using a value approach – make sure the content of your offer is clearly understood; your value proposition is front and foremost. Leverage the perception of value so you can hike prices accordingly. This takes a more holistic approach to customers needs and wants by considering customer feelings – Do they like you? Is the design appealing? Does your offering make them feel good?
A great example of how this method can work is fair trade coffee – it is consistently more expensive in a bag and in a cup. Initially the market for coffee was very clear, there were lots of competitors and customers so the price was very stable and the profit margins pretty consistent. But, by raising market awareness as to the conditions the coffee was grown and picked in and offering a more expensive alternative that drove to prevent the bad conditions the market was opened up to a more costly product. The benefit to a customer of fair trade coffee is exactly the same as that of regular coffee – they are as tasty and satisfying except that the fair trade coffee has an extra value proposition – it also enables the customer to directly support poorly paid communities; there is an added value of ‘feeling good’ that enables a higher price to be charged.
If you are a start-up building a value perception recognise that can take a little while, especially given ‘value’ for services is usually built on trust and testimonials. Having a go-to-market strategy that incorporates a ‘trust building’ and ‘value demonstration’ component will be necessary to implementation of this kind of pricing. So start low, and then hike your prices regularly as your reputation and customer base improve.
Remember, the “optimal price” of your offering is actually changing daily.
Yep, I know that seems frequent, but how often do your costs, competitors, or customers’ perceptions vary? – I’ll bet at least one of those changes pretty much each day… And I am also pretty sure, unless you are a fresh food producer selling at the wholesale market, your prices stay the same; probably year in year out – WHY???
Here’s to raising your prices – even just a tiny bit!
PS. It is also important to understand the difference between your mark-up and your margin – click here – for clarification.