Is putting up your prices a leap of faith?
The world is getting more competitive and, as we pull out of recession, we’re faced with some very stark choices over how to increase revenue in a time of weakened demand and increasingly savvy consumers. Putting up prices isn’t the most obvious thing to do, but let’s just think about it. It’s true that the economy has been hurting and many companies reacted early on in the recession with big price cuts to try and keep their machines, shops and people busy.
Take Domino’s, for example. In late 2009, the business had been charging about $9 for a medium two-topping pizza, but to boost sales it began offering cash-strapped consumers two of its two-topping pies for $5.99 each. Several weeks later, Papa John’s and Pizza Hut fired back, by offering large three-topping pizzas for just $10 - at least a third less than the usual price. Soon they improved the deal still further, so that customers could buy a large pizza with unlimited toppings for $10. The result was that sales at all three chains rose and today many chains are still offering discounted pizzas.
Initially, this type of price-cutting makes sense but, in fact, most of those who introduced discounts early saw their competitors do the same and so there was no overall advantage to be gained.
We’re assured that the we are coming out of the recession, but it remains the case that in many sectors demand is weak. Government cuts are kicking in, with further jobs at risk, and some people and some business are still reluctant to think about price increases.
Any organisations which did discount have lost margin even if they held sales volumes. On the flip-side, many of those companies which held their prices have still seen a drop in sales and profits. Now people treat any discounted prices as normal, any positive leverage they gave has long gone.
Those of us still in business have survived the downturn, but that doesn’t mean we’re out of danger; more companies go out of business on the journey along the bottom or on the upswing of recovery, as they do while the recession is at onset. If you’ve got this far, is your business in a reasonable state of health to survive? If so, what comes next?
How can we bolster sales in a time of weak demand? The answer is to shift our attitude about price rises. For example, a simple 2% overall price increase across a product range (40% margin), with no loss of sales volume or increase in costs, would generate an additional 5% profit. If you put up prices by 10% at the same margin you could afford to lose 20% of your turnover without affecting overall profit. If you are 100% confident in the value you offer your clients, then you have absolutely nothing to fear from raising your rates.
People don't buy products or services, they buy value - the value or benefit that product or service delivers to them. Of course, buyers define that value for themselves and it is also true that effective marketing and sales can guide them along the path – either of low priced products or more premium end. Product differentiation - in the eye of your customers - can greatly influence your pricing power. If you can make your product or service stand out from others, and demonstrate it offers benefits your customers believe no competing product has, you will be in a greater position to increase prices.
It remains your job to figure out the most effective marketing and sales path to get your customers to join you at that same price-point conclusion.
Take a bold step and get rid of unnecessary discounts. Many organisations would improve profits substantially by eliminating unnecessary discounts. By careful analysis of your customer base, most would find the top customers generate some 80% of sales – the old 80/20 rule. Now work out the profit contribution of all your current customers. The likelihood is that 10% of your current clients are costing you money. Which smaller clients are still getting big client discounts? Which people are costing you money? Ditch them or, at least, ditch the unnecessary discounts.
Consider adaptive pricing. Some companies have avoided the trap of lost profits by using this method, which capitalises on the fact that different customers have different needs and therefore place different values on a given product or service. The key to adaptive pricing is realising that price, like colour or style, is simply one of a product’s attributes. And companies routinely vary colours and styles to appeal to different kinds of customers. They sell through different channels (online, direct sales, through high street stores) and sometimes charge vastly different prices for each method. By using adaptive pricing, companies can adjust a product’s attributes to better appeal to their customers’ sense of value without necessarily dropping the price.
The simplest adaptive pricing method is called versioning, offering ‘low cost’ good, better, and best varieties of the same product. A lower-priced version (poorer quality, smaller quantity, fewer features) can be a powerful magnet for price-sensitive customers. A high-premium option will attract someone for a totally different reason. This may allow you to offer a discounted and slimmed down service or product, while keeping your ‘signature product’ at its current price and gaining an overall price increase of 2% across the range by developing a top-end version.
Always think of your current clients when you consider changes to pricing, because client retention is much easier and cheaper than client acquisition. So what does that actually mean to your business? It means that focusing on keeping your existing clients happy while you’re on the hunt for new clients is a smarter strategy than focusing all your energies on constantly generating new business to the detriment of existing ones. That being said, this is not a reason not to raise your prices. Your existing, loyal clients are probably loyal because of the service and value you give them, not the prices you charge them. If your loyal clients’ feathers get a little ruffled when you raise your prices, then have an offer ready to smooth over the ripples and sweeten the deal. They pay the new price and get some added value element which means a lot to them and doesn’t cost you too much, if anything. Perception is everything, or, in the case of price, perceived value is everything
Let’s go back to the original question: is putting up prices a leap of faith? It is, for sure, but one worth considering and acting upon. With more self-confidence, a better understanding of the value add to our customers, better marketing, fewer erroneous discounts and the use of adaptive pricing of product/service variants we can increase both prices and profits.
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