Pricing is one of the most important areas of your business for increasing profitability, but conversely its one of the areas that business owners spend the least amount of time thinking about. In this article, I am going to tell you how to think about your pricing so that you can achieve a more profitable business and do so without feeling the need to apologise to your customers.
Why is pricing so important?
The price you charge reflects the value of what you do, and is the only element of your proposition to generate revenue (all the others generate cost). To increase your profits, you could try and get more sales in, increase your marketing spend, or cut your costs and your overheads, but increasing your prices will get you to a place of improved profitability far more quickly than any other method.
Everybody’s costs are increasing and so are yours. You know that inflation is rising, and recent reports indicate that in 2017, UK inflation costs the average person an extra £900. So, for a family of 4, that’s an extra £3,600 you have to find. Did you award yourself a pay rise of that amount this year (after tax)? If not, you will be experiencing declining profit margins. You can use price in a legitimate way to increase the amount you charge for your services, as long as it is done on the basis of offering great value in return for what you do, and is not seen as a short-term fix.
How to increase your prices:
1. Values and Benefits
The first step is to be clear on what value you are providing to your customers. Write down a list of all the values and benefits that you can think of, and then discuss them with some of your customers. They will add some more you hadn’t thought of. Then ask some different customers to rank them in order of importance. Once you have a good number of responses (at least 10), you can look for any trends. You may be surprised at what you find, and this should help you think about how you position your service and how customers value what you do, and what they are willing to pay.
2. Segments and Products
Using the list of prioritised values, see if you can put the values into groups which follow customer segments (e.g. high value versus low value) and in turn you can create a range of products that deliver the values and benefits expected by customers in each segment. If you have a set of three products with a high, medium and low price, a good rule of thumb is to have a ratio of roughly 12:5:3 between the prices for each of the product as follows:
|B (Mid Price)||£2,000||5|
The premium prices “anchors” the customer’s mind and sets a benchmark to the level of quality you offer (and a few customers might buy at this price as well). But the main decision for most customers is between prices B and C, so you should think about these as the key price points for your products and services.
3. When to Raise Prices
If there is a trend in your industry to raise prices at the same time every year (e.g. January), then it makes sense to stick with that trend otherwise it will be harder to explain why you are changing your prices in June. However, if this is not the case, I actually think it is better to think of this as an ongoing activity. You should always be thinking about your value proposition and adjusting your prices throughout the year according to the feedback from your customers.
4. Mindset and Beliefs
“What if I lose customers (or sales) as a result of increasing my prices? What if my competitors react by lowering their prices?” Well, all of these things are possible, but equally I would ask, what if you don’t have a sustainable business as a result of not maintaining or growing your profit margins? All of these concerns boil down to your mindset and any limiting beliefs you may have. You have to adopt a positive mindset and believe that you offer great value for your services and that your customers deserve the help and support they get from you. You need to be brave, take a deep breath and try out some new pricing and be prepared to lose a few sales as a result. This is the only way to achieve increased profits using this approach.
5. Communicate with Confidence
Finally, the best way to ensure your new prices stick is to have a clear communications plan. If you are going to be increasing your prices to your existing customers, give them plenty of notice, but don’t say by how much your prices will increase. For example, indicate that your prices will be increasing in a few months and that you will let them know nearer the time exactly what the impact of this will be. This will set the expectation in the minds of the customers to know that a price increase is coming. If you are writing a letter or email to outline the price changes, avoid using any negative language (“with regret / I’m sorry to announce / unfortunately I am having to raise my prices”) and only use positive or neutral language. You need to sell the benefits and values of what you do, not apologise for how much you charge for it. And when the time comes to communicating the new prices, do so with confidence knowing that you have carefully analysed the value your customers get from your services and that you know that the service you provide represents great value for money.
You should never have to apologise for the prices you charge. You can achieve this by being very clear about the value you provide to your customers and knowing that your customers will be happy to pay the prices you charge in return for the services you provide.
Good luck, and start thinking now about your pricing strategy so that you can increase your profits!
Mark Peacock: The Pricing Coach
Mark’s mission is to help small businesses unlock value through better pricing strategies and price coaching. He is passionate about pricing and how it can be used to achieve improved results quickly and effectively. For more information, please visit www.markpeacock.co.uk or follow Mark on Twitter @ThePricingCoach.