What’s your perfect price?
Pricing is notoriously difficult. We tend to undervalue ourselves, which inevitably leads to under-pricing ourselves. Under-pricing yourself leaves you having to work harder and longer hours, to maintain the same profit margin. Instead of managing as many customers as we can cope with, why not consider working with fewer clients, who pay who more? That way you can provide an excellent service or product to people who appreciate what you have to offer, without having to scrabble around working all hours for a tiny profit margin. The golden rule is a 10% increase to your prices will increase your profit more than a 10% increase in sales volumes, or a 10% reduction in costs.
But before you raise your prices, make sure you have made other changes which will also benefit your profit margin. Ensure that your costs have not crept up. Regular checking for better deals on consumable services will help to reduce your monthly outgoings. It can be easy to neglect this area, and yet this can make a massive different over the year.
Don’t always run around trying to attract new customers; also concentrate on the ones that you have. Studies shows that it can cost anywhere between 5 and 25 times as much to gain a new customer, as it does to retain an existing one. And the cost alone isn’t the only reason to concentrate on your existing customers. Consider the research carried out by Frederick Reichheld of Bain & Company. This showed that increasing customer retention rates by 5% increases profits by anything from 25% to 95%. Not bad for simply communicating with your customers and listening to their needs!
Take some time to look at your current customers. Why are they staying with you or why are they leaving? Working out the answers to these questions will give you a better understanding of your customers’ motivations. Don’t be afraid to penalise bad customers. If you have some who are regularly slow to pay, the time spent chasing payment is a cost, so make sure you reclaim that cost by increasing your late payment fees.
It can be scary to put your prices up. However, the work that you have done understanding your clients will help you here. If your clients stay with you because you offer an excellent support service alongside your product package, then before you increase your prices, remind them of the extra benefits that they are getting. When we educate our clients correctly, they then appreciate the value that they are receiving. Few people are solely motivated by price; our decision-making processes are much more emotional than we like to believe. Tapping into the emotionality of people’s buying decisions will again help you to retain your customers as you implement a price increase.
Be clever and try to think ‘outside the box’. Niche markets, by their very nature, will always be able to command a higher price than a broader marketplace. Look at your skills, your services and products and see if there is a niche market that you can build into. Immerse yourself in it, gain knowledge; being an authority in your market is a great example of adding value and benefits for your customers.
Once you have worked your way through these areas you will be ready to increase your prices. Have a plan; staged price increases can be easier to manage than large jumps. Make sure that you communicate with your existing customers. Most people respond well to being kept informed. Don’t just increase your prices without warning – your customers need to feel valued not neglected. Don’t worry if you do lose some customers when you implement your price increase. You may win them back once they realise the value you provide, value that they cannot get elsewhere from a competitor.
A management accountant will be able to hep you with your pricing strategy. They will be able to show you the projected returns of a price increase, including a percent customer drop-off, so that you can see the increase to your bottom line. They will help you to construct the correct pricing policies for your industry and marketplace, so that you maximise profit while retaining customers. And don’t forget why you are putting your prices up:, in the words of the L’Oréal advert: “because you’re worth it!”
If you are looking for a management accountant to help you improve your pricing structure, call TLA Business Services today on 01905 21411, to arrange your meeting.