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Increase Your Prices Without Pain
Most Small &
Medium-Sized Enterprises (SMEs) 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
find another supplier.
After being in business for a while owners have more 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 price levels that
are too low and are never able to get them up to where they should be.
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 at all.
The price customers are willing to pay is simply a reflection of their
perception of value. If people choose to purchase from a business 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.
It’s possible to raise prices as needed and when needed, based on
pre-set profit margins. It’s also possible to raise prices
product-by-product based on detailed expense calculations including
storage space allocated, heated/refrigerated space required, freight
costs, marketing cost percentage for a particular type of product – the
categories vary from one business to another.
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 unfavorable. Is there a way to raise prices without
affecting customer relationships?
The answer is ‘yes’ - most customers won’t thank a business for a price
increase, but if they’re realistic about it they’ll admit they all face
the same rising costs at their home and place of work 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 in your organization 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 your firm it will make little
difference in today’s competitive world 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. Price objection is normally only
superficial; quality in product and service is more important in the
longer term.
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 looking elsewhere. However, there are guidelines that
will help you avoid disaster while improving your bottom line.
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 like raw materials, fuel and rent that 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 against making individual
purchases that they can calculate, and often encourages them to make the
additional purchase. They can take advantage of a special offer or they
can still buy the individual items if they wish.
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’s also possible that you could charge a premium for your
products in ‘prime times’.
Another way to achieve better overall pricing is to offer different
types of customers different prices. Many businesses offer concessions
to children, senior citizens, students and even unemployed people. And
of course there’s always the possibility (and customer appeal) of
offering a trade-in against the purchase of something new.
It’s important to take control
of your prices and to be sure they aren’t being dictated by your
competitors or your customers. Do your calculations carefully and make
sure that every price you charge generates sufficient profits for your
business.
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.
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