When focusing on profit many businesses tend to focus on increasing the volume of their sales. They typically do this by marketing and selling to more customers, up selling new services to their existing clients or by increasing repeat purchases from their existing client base.
Another way to increase profits is by managing costs more effectively. Business costs typically rise as your business grows so it’s about getting the balance right. It’s ensuring that cost doesn’t affect the quality or how you deliver your service as your business grows.
What about Price?
What is often forgotten when it comes to increasing profit is focusing on Price.
A small increase in price can generate a much greater increase on profits and it doesn’t cost time or money to do this. Compare this to increasing your sales which will always involve either more time, cost in marketing or by hiring someone to do this for you. Of course, a constant flow of leads and clients needs to come into your business, but in terms of increasing profits ‘pricing’ is often overlooked.
A large study conducted by pricing experts McKinsey and Company found that it only takes a 1% price increase to increase profits by 11.1% and it proved more successful than the sales or cost activities.
So why doesn’t price get the same attention as sales or costs? It’s because pricing is steeped in fears such as ‘it’s difficult and challenging to put into place’. Raising prices produces uncertainty and a fear of rejection which equates to a fear of lost business.
The reality is that there’s a lack of knowledge around pricing that causes this fear. Pricing isn’t something you learn at school, and if you did it would be taught through economic theories that don’t practically help small businesses. By understanding your ideal client, the value you deliver combined with pricing psychology principles – you can eliminate this fear when it comes to pricing.
If we look at how most businesses use pricing in their business it’s usually one of the following:
- Cost plus: the total cost of service or product + a % mark up
- Competitor pricing: based on the pricing of competitors
- Annual pricing : a once a year price increase that includes inflation
- Best guess : ‘a finger in the air’ price
- Value based pricing :a product or service’s price based on how much the client believes it is worth.
Value based pricing means setting a price that your customers are willing to pay based on the perceived value to them of your product or service, not on the cost of providing it.
Value based pricing is highly recommended by academics and leading consultancies and it’s one that I encourage my clients to use in their businesses. This is because it’s based on perceived value and not on the cost of providing it and it enables you to grow your business through higher profit margins.
For example, if you’re experiencing tooth pain you’ll likely to seek a dentist to eliminate the pain. You pay the dentist to resolve your pain and it’s likely to be at a premium cost even if it takes the dentist only 30 minutes of their time.
That’s because you’re paying for the value of their expertise and experience which will resolve your tooth ache.
Another example of a company that uses value based pricing is Apple. They charge the maximum price a customer can pay for their products and they can, because of their perceived value as an aspirational brand, with high quality design and materials.
So how can you implement a pricing strategy in your business that involves value-based pricing?
1/ Give your pricing more focus. Pricing should be reviewed regularly and not as a one off annual activity.
2/ Focus on your positioning: align your service to attract the right customers by identifying and understanding in detail your ideal client.
3/ Consider what the lifetime value of the result a client will achieve by using your services. If you’re a coach or in the business of ‘transformation’, looking at pricing this way can transform your business, and the way you value your services.
3/ Consider packaging your services. What features and benefits do your clients value and how can you bundle this up into offering them a package with 3 simple options to choose from. For example you can offer an entry, standard and premium packages with increasing levels of pricing and value.
By offering your clients 3 choices you’re increasing the value of the sale whilst appealing to those clients who are price sensitive.
In summary ‘Price’ should be one of your marketing pillars that is reviewed regularly and not just occasionally, as you could be missing out on additional profit.
To your success!