Isn’t it about time you raised your prices?
You’ve squeezed the middle to control costs. You’ve held your prices at their current levels for some time because customers recoiled at the thought of rising prices with low inflation. Now, it’s time to look at the top line for profit growth.
It’s not that you will be overcharging your customers with the increase — you’ve been under-charging them for some time. What per cent of your customers value what you do by a factor of five or ten or fifteen per cent more than they are paying right now, but you have not captured that additional profit out of fear that you may lose the business? Have your customers so intimidated you that they, not you, now hold the power over your profit in the future? It’s time for a change. Raise your prices. Capture that additional margin.
There isn’t a week that goes by that someone fails to complain to me about the poor shape of their profitability. My answer is always the same: Do something about it. Take a bold step forward out of the mess you are in. Most companies have gotten rusty when it comes to price increases. Look at the numbers. If you are a $10 million company, operating at a three per cent net profit, a one per cent price increase yields a 33 per cent increase on your bottom line. Can you not push through a one per cent increase? Who does your sales training? If your sales staff can’t push through a measly one per cent increase, you’ve got more problems than pricing.
Raising prices begins with the right attitudes. Attitude Number One is: “”We are not a non-profit organization.”” Unless your company is a non-profit organization, your mission is to make money- — lots of it. Attitude Number Two is: “”We deserve to be compensated for our value added.”” Why would you give away valuable resources to customers who do not want to pay for it? There are plenty of people who will drain your valuable time and resources and expect not to pay for it. Identify them and isolate them. Attitude Number Three: “”Customers want to deal with companies that are prepared for the future, and profitability prepares us for the future.””
Unless you have another source of profit for your company, you need money to grow your business. A viable source for this money is to capture that profit that you are not reaping today. Raise your prices.
You’re saying to yourself, “”Reilly, you’re preaching to the choir. Tell me how to raise my prices?”” First, aside from an across-the-board or strategic price increase, you can surreptitiously raise prices and build profitability by doing the following: Increase your minimum order size. This forces buyers to look for other ways to do business with your company. They may give you an order for the goods they would have sent to your competition. It also lowers your cost of doing business.
Second, begin charging for value-added services. Why give away valuable services, especially to someone who would not normally pay for them? If a customer says that they do not want to pay for the value-added services, it tells you that the customer perceives no value in the service. Then, you can eliminate the service and lower your cost of doing business. It makes no sense to offer a service to someone who sees no value in that service, and if they perceive value in the service, they should pay for it.
Third, enforce your terms discount. If customers routinely take the terms discount and fail to pay within the time frame, why let them get away with that? They are defying your terms of agreement. Chances are the person who makes the decision to steal money from your company is not the same person with whom you deal. Tighten this loophole and boost your profitability. If you respond with, “”Oh, that’s just the way things are done in the industry,”” quit complaining about shrinking margins. You’re just as guilty as the customers whom you blame.
Fourth, launch an upscale version of your product or service. Customers are already sold on your company and the product or service. When you launch the newest version or upgrade, it gives you the perfect opportunity to raise your prices. The justification for the increase is implicit in the upgrade. You may even offer the older version at the old price for a while to let the customers adjust to the new price level.
Fifth, a variation of number four is to change the package in some fashion to reflect the change in pricing. Perceived value influences the customer’s definition and expectation of value. If they see a different package, they assume it is a different solution or an upgrade of the old solution. Software companies do this all the time when they change versions or upgrades. Buyers automatically see the new version in the packaging.
Sixth, raise some prices and lower other prices. If there is a product group that does not move and you want to create movement while protecting yourself on price increases, lower the prices for the non-movers. It gives your salespeople alternative selling points for the price increase. It also tells you if there is a more effective price level for the non-movers. If the non-movers fail to move at the lower prices, you may want to consider eliminating the product line.
Seventh, use price increases to target specific market segments. If more than 50 per cent of your customer base is price shoppers, you have positioned your company as Wal-Mart. There is nothing wrong with that as long as you know you are the discount house. If you do not want to be known as the discount house, you can raise prices for that price-shopping segment and narrow the ranks. Some will leave; some will stay. The ones that leave were going to leave anyway the next time someone cheaper comes along. The ones who stay are paying more for your products and services.
If you are complaining about making too little too often, you need to look at your top line. Raising prices begins with courage. Make a decision and stick to it.
You will lose some business when you raise prices, and you will keep business also. There is a risk in raising prices. There’s a greater risk in not raising prices.
Tom Reilly is a professional speaker and writer.