In a Walmart/Dollar Tree world, too many entrepreneurs believe that the key to success is the lowest possible price. But Walmart has the advantages that come with being the world’s largest retailer. And, as Seth Godin puts it, the trouble with a race to the bottom is that you might win. (And no one will win a price war with a Walmart.) Jeff Haden presents six ways to make more money by charging more. Counter-intuitive? Read on:
BY JEFF HADEN, INC. Magazine
Six ways to raise prices and increase margins while keeping customers (relatively) happy.
My margins are too thin and I need to raise prices. But I’m concerned about pissing off or even losing customers if I do. Any ideas?
— Name withheld by request
If you’re in retail the mechanics of announcing and actually raising prices is easy; you just swap in new pricing for old. But in other industries, the way you phase in higher prices can make a huge difference. Here are some ways to make the process a lot more seamless:
Raise prices as you add services.
If all you do is raise your price, your customers will naturally focus solely on that price increase. But if you have new services or products ready to roll out, it’s fairly easy to lessen the impact of a price increase.
The key is to show greater value along with higher prices. While some customers focus on price alone, most consider the balance of value and price. Show you’re offering greater value and a price increase may be a moot point.
Create different volume points.
You don’t always have to raise prices in order to increase margins. Lowering volume while maintaining the same price automatically increases your profit margin. A restaurant can often decrease portions while maintaining price; food, health and beauty, and other commodity providers do the same thing. (Introduce a cool new shampoo bottle that oh-by-the-way holds 10 ounces of shampoo instead of 12 and your margins naturally increase.)
Or you can introduce a lower volume point with a higher per-unit price. If you currently sell a 60-widget package for $120, add a 20-widget package at a cost of $50. Customers are conditioned to expect discounts on higher volume and to pay a higher per-unit price on lower volume.
Create bundles of products or services.
We tend to assume we get a better deal when products or services are bundled, even when we can’t determine the cost of individual items. Create a bundle of similar services, or create a bundle of products with a complementary service, and you may be able to raise prices on some of the individual items while masking that increase inside the bundle.
Establish new service options.
Say you promise a 48-hour turnaround. If some customers could benefit from a quicker turnaround, introduce premium pricing for 24-hour (or less) service.
Again, provide additional value at a higher price and most customers will be less resistant to the change; in fact, some may willingly switch to the options.
Change or eliminate payment term discounts.
Many businesses like yours offer discounts on quick invoice payment. Offering a 3% discount on invoices paid within 5 days definitely increases cash flow, but it also cuts your margins by 3%. If you can afford to wait, phase out the discount. (Or switch to a lower discount on a greater number of days so you keep cost-sensitive customers relatively happy.)
In some cases you may have no option but to simply raise prices. When fuel prices skyrocket many businesses are forced to raise prices due to the dramatic impact on their costs. If you sell building supplies and the cost of raw lumber has increased by double-digit percentages, your customers will understand if you are forced to raise prices in order to stay in business. If that happens in your industry, let your customers know why you’ll need to raise prices.
Most are already aware of the situation and will understand–they won’t love it, but they will understand. Just keep in mind that your customers may also expect prices to return to pre-crisis levels if the conditions creating the price increase fade away. If the cost of fuel goes down dramatically, your customers will expect prices to decrease as well.
But what if you feel raising prices, no matter how you implement the change, will negatively impact your business? There is one other option.
Sometimes the best way to “raise” prices is to cut costs. While decreasing fixed costs is certainly possible, in the short term the easiest and quickest payback comes from attacking variable costs.
Focus on areas like labor, productivity, quality control, and shipping. And while you’re at it, attack semi-variable costs like maintenance and utility costs. Reduce any expense and your bottom line automatically improves… without raising prices.
And don’t forget your cost of inventory. Whether you sell a product where your inventory is your product, or whether you provide a service where your “inventory” is employee capacity, look for ways to maximize the utility of inventory without keeping too much product or labor on hand.
“Just in Time” is almost always cheaper than “Just in Case.”
JEFF HADEN learned much of what he knows about business and technology as he worked his way up in the manufacturing industry. Everything else he picks up fromghostwriting books for some of the smartest leaders he knows in business.