Review Your Pricing Strategy
Today, I want to talk about pricing. We will talk about price increasing strategies designed to increase your profits without losing customers and if you did lose some, what would be the net impact. While it sounds easy to just increase your pricing, it should be planned out and carefully considered. If implementation is done well, it will give you a nice bump. If you are a merchant, you know Visa and Mastercard do price increases twice a year. Your processor leads their price increase message to you about how they are increasing your pricing as a result of what Visa and Marstercard are doing. What they might not mention is the increase usually has a little extra built in for them as well.
So Why Not You?
Have you ever wondered how much more money you could make if you raised your prices? Most business owners have, but their internal warning bells go off that they will lose all their customers. This explains why 90% of the businesses are out there competing on price.
Low Price Shoppers
We all have them. They are also the shoppers that seem to take up the most of our effort and time, but just are not giving us the same results. The worse part, Low Price Shoppers are not loyal. If a competitor, undercuts you, they will be the first to leave.
High Price Expectations
Some owners would say, if you charge more they will expect more. That is true, but instead of rationalizing a lower level of service to get success, have confidence you can provide world class service to your customers. Great service to your high end clients, will build loyalty with them.
Let's Look Deeper
Let us say that your company sells a product for $90 and the business has a net profit of 10%. This means the owner put $9 in their bank after all bills were paid. if the business increased their price by just 1% or $0.90, they would then have put $9.90 in their bank account. This means that a 1% price increase would generate 10% improvement in profits. Some of you might be saying, no, that is a 1% increase in margins. I would argue that it a 1% increase in margin of a business previously with a 10% margin is a 10% improvement in that margin (1% / 10%).
Now, let us say this business had a 1,000 customers a month. When they were profiting $9 per product, they would then have $9,000 in profits.
If their profits are now $9.90, they need 910 customer to breakeven (910 x $9.90 = $9,009). They can lose a staggering 90 customers a month and maintain the profits they had. But do you think they will lose 9% of their customers for $0.90? I agree, I dont think so either.
Psychological Pricing Barrier
When the first digit changes, their is a perceived jump in price. If you are able to adjust your price without impacting the lead number, it does not appear to be a jump.
Example of the business selling a product for $90. When they went to $90.90, it does not register in our subconscious mental math. We have found pricing that ends in a 7 or 8 as a sweet spot. So if the business moved their pricing to $97 or even $98, they will not see the same resistance as $100. When that first digit changed, it was noticed.
This is why TV ads have $19.95 to $19.99, not $20.
So one strategy would be to review your pricing and see which products you can adjust without reaching a Psychological Pricing Barrier. You may be able to adjust some products more or less than another.
Across the Board
They strategy would be the same percentage across the board. An example of this would be a 7% pricing adjustment. So our business example above would now be $96.30. In this case, luckily it did not cross the Psychological Barrier, but if you do not add a review step at the item level or service level, you might have some that do. You may even do some sort of hybrid.
Before Implementation
Before implementing your changes, do some research on your competition. You should always know where this would be, especially if what you sell could be considered a commodity.
The key here is to determine the uniqueness of your product or service, including delivery method. If your product or service or distribution over your competition, then a price increase can be easily implemented without suffering any adverse effects.
Comparison
So get a list of competitors together and ask yourself:
What prices do you charge?
When was the last time you raised your prices?
How do they compare to your competitors?
How does your product or service compare?
Do you provide any value-added services making yours more valuable?
is it easy for your clients to price shop?
Do you know your competitor's biggest weaknesses?
Can you compensate for that weakness?
What would you estimate the impact on your conversion rate with a 3% increase?
What would your estimated increase in profits be if you did a 3% increase while maintaining your current conversion rate?
I know this sounds like a lot, but if you study this and you can get some great results.
Still No Time?
Still do not have any time. Either hire a business student or host an internship for a business student to help. They gain valuable first hand business experience and you gain access to breakthrough information.
Add Value vs Discounts
Some business owners go down this path, get their prices updated in their system, and then off discounts that end up countering the increase. Focus on adding value first. if the customer believes there is a higher value, they will be okay with a higher price. Example if you dry clean your clothes would be okay paying a little more if they included pick-up and delivery to your work place? I would. How about you? What do you offer that eliminates the price as a decision point.
If you have questions about your specific business, connect with us to see how we can help.