Raising prices can sometimes be tricky. How can we raise price without having our clients run away to our competitors? Even if the clients are okay with it, sometimes we delay just playing head games with ourselves. This video has some tips and tricks to consider when thinking about increasing prices.
Hi, I’m Jonathan Ankney, the Small Business CFO, and today I want to talk a little bit about raising prices. If we are going to be successful and if we’re going to be profitable in our businesses, then one of the things that we need to be prepared to do is to raise our prices as inflation increases. If we don’t, we’re going to start to lose money because our living costs are going to go up, the cost of doing business is going to go up but our prices haven’t changed. So we need to increase our prices.
I think that there are a number of things that we need to do as we contemplate raising prices and it actually starts first of all with understanding value. Know what the value is to the customer. Be prepared to look at your competition. I know for me, for example, I had to go and look out to see what competition was charging through a trade association guide to pricing and even down to the region – the northeast region here – to see what the prices were being charged by my competitors for similar services. And I realized that I was underpricing and it got me to thinking about how I could increase my prices.
But the next thing was that I had to have confidence in my own value. So as you think about increasing your prices, be sure to have your confidence in it. And by the way, that’s one of the reasons you can go to outside sources to confirm what your value is, so you’re not thinking to yourself, “Oh, I’m just making up my value.” No, actually be thinking, “What is the value? What is the competition charging? How much am I saving my customer? How much am I allowing them to grow?” and then having confidence in that.
We can always test prices, especially when it comes to introducing new products. So how do we do that? Well, we come up with an estimated value to the customer based on what we’re seeing in the market place but saying to our customers, to our existing customers or even, let’s say, in our promotional materials, “Product X. New product, product X. For a limited time only, introductory pricing.” So you convey what the true value is, but then discounting it just to see what the response is to that.
And the other thing that you can do too, is–even with your current prices — let’s say you’re getting a new client, it’s an existing product. You state the price and say, “I’m going to start off with a discount to get started.” In fact I do that with new clients, with my financial services business. When I get a new client and it looks like it’s going to be a big project, I’m going to spend a lot of time on it and I’m fairly well aware of what their budget is, I say, “You know what, for the next 3 (or 6) months what we’re going to do is I’m going to discount it for a little bit,” because I know that I’m going to be doing more. And what that does is it conveys that I’m interested in working with this customer. It conveys to them that I value it, and I’m able to work at a discount because my overhead is low. So that’s something that you can do, in terms of testing prices.
Another thing that we do, in service businesses especially, is “step pricing”. What happens with step pricing is that you “step up” the prices for new customers. So you have a band of clients, let’s just say that you’re an attorney. And attorneys typically charge a lot of money. $150 an hour is actually cheap for attorneys, but let’s just go with that as an example. They have a group of clients that they charge $150 an hour to. But they realize that they could be going up to $200 an hour. So what they do is that the next 5 or 10 clients that come in, they charge $200 an hour for. And once they see how that works with these clients, and let’s say that they have some established clients that they continue to work with, then they communicate back to these clients, “My new price is $200 an hour.” Now they raise them up and now the whole group is charged $200 an hour. They might lose a client in the process but if you think about it, now they have more clients, still have more clients and they may have had a client that was on the edge that fell off, that it just wasn’t the right thing for them. And they’re saving time, because ideally what we want to do is to be charging enough that it’s not wearing us down but we’re still making enough money.
Also, and finally, have a pricing policy. When you take on clients, be sure to convey to them, “I review my prices (and you can give a time period).” But let’s just say you review them every year. “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% per year,” something like that. Reiterate the payment terms. So by establishing up front what the expectations are, in terms of when prices are being reviewed, what your evaluation criteria is and the payment terms, it makes it much easier later on down the road because you’re not struggling and saying, “Oh, should I tell the clients that I’m increasing my prices?” They already know to expect it.
So that is pricing from 30,000 feet. I’d love to hear what your thoughts are. You can reach me through my Facebook page or leave comments below. Thanks for watching!