Most SME owners undervalue themselves and consequently have prices that aren’t genuinely high enough. The prices may cover the costs of the product and maybe even the marketing costs plus a small profit, but they could still be higher and not cause customers to leave.
A business owner should take the time to study the market, to learn what their competition is charging, and to find out what the marketplace is willing to pay, which is usually more than what they’ve been charging. Many businesses start off with prices that are too low and are never able to get them to where they should be. Here is our additional guide on setting a pricing strategy
Setting prices is one of the biggest challenges for any business. Business owners know how important pricing is, but get worried whenever they consider putting their prices up. The fear, of course, is that if they increase their prices, they will lose their customers. However, it’s not necessarily that way.
The price customers are willing to pay is a reflection of their perception of value. If people choose to purchase solely on the basis of price, they will go somewhere else on the basis of price. Price is not a profitable way to differentiate your business from its competitors.
The prices you pay will go up
In today’s economy, margins can be so tight that a business probably can’t afford to run more than a year without looking at price adjustments. The costs to a business for outgoings such as insurance, energy and wages will usually increase annually and eventually the prices of goods and services have to reflect these increased costs.
Regardless of how you set your prices, if you calculate costs accurately the numbers should convince you to raise your prices regularly. This will usually cause a reaction from some customers, and more often than not it’s going to be unfavourable. Is there a way to raise prices without affecting customer relationships?
The answer is ‘yes’ – most customers won’t thank you for a price increase, but if they’re realistic about it they’ll admit they all face the same rising costs as you do. If the price adjustment is appropriate and isn’t out of line from the changes they see in other products it will have a better chance of gaining their acceptance.
Accommodating those that do have genuine issues must be a part of your price planning and those who deal with customers should have the tools and authority to do what it takes to keep the customer. This doesn’t mean giving every complaining customer a credit to compensate for an increase; that only makes it harder to apply the increase next time. But something like a free gift to an existing customer is much more cost effective than trying to acquire a new customer.
It’s not all about price
Customer relationships are about so much more than price. If the customer does not perceive real value in continuing the relationship with you it will make little difference whether you had raised prices by one percent or ten percent; they’d have gone anyway!
If the prices you charge are fair they will allow you to retain your customers and to obtain new ones.
How can you increase prices without driving customers away? There’s no magic formula that will show you how much you can increase prices before customers start to look elsewhere.
Before increasing prices you need to be confident about your new pricing. This is the best reason to do your pricing calculations carefully; you’ll know that the new prices are the right prices. If you don’t have this confidence your customers are likely to notice your uncertainty and wonder if you’re just trying to see how much you can get from them. If you question your pricing, why shouldn’t your customers?
Most customers will understand that you must pass on the increased costs of things you don’t control. As long as you can explain the reasons for your price increases customers won’t imagine you’re padding your profit at their expense.
If you increase prices above those of your competitors, make it clear in customers’ minds that your higher price delivers greater benefits than the lower prices of your competitors. It never hurts to remind buyers how long it’s been since your last price increase and to show them how competitive your prices still are.
Remember that your customers are buying the results that they get from your product or service. Tell them what those results are and show them how much it would cost to get those results some other way.
Creativity counts in pricing
There are ways to vary your pricing by expanding your offerings. You can, for example, create a package of products or bundle your products. Although individual items remain at the regular price, a ‘package’ of product A and product B will cost the equivalent of 10% less than if the two products were purchased separately.
This offers the customer value-for-money and often encourages them to make the additional purchase.
You might want to take advantage of a product’s seasonality by charging different prices at different times of the year or if there are busy times of the day you might want to offer a reduced price for off-peak purchasers.
It never hurts to do some experimenting with a new pricing structure and monitor the outcomes. Even if a few customers go elsewhere you may well find that your increases in revenue offset any losses in volume.
About David Officen
David is the Founder and Managing Director of proCFO. David combines an accounting and consulting background with commercial experience both as a manager for large commercial businesses and as the owner of private and family businesses.