I see a lot of small businesses right now, opting to lower their prices or fees (herein called prices), in order to boost sales and grow their business. However, I’m also seeing a smaller number of businesses, increasing their prices for the exact same reason.
Before you decide to cut or increase your prices, here are some things to consider.
Price cuts are easy – Increasing them again, well…
As I have said many times before, lowering a price is easy, but increasing that price again can be a far bigger challenge. This is why it’s essential that you make sure the numbers add up, before you do anything!
For instance: Imagine my friend Bob decides to reduce the cost of his widgets by 25%. Depending on his profit margin, he may need to 2 or 3 times as many widgets, just to have the SAME profit figure he had before his price cut. Many people slash their prices, only to find that the extra sales they generate, leave them worse off than before AND with more clients or customers to service too.
Price cuts can work, but only when the numbers are working for you. For example, if you sell three times as many widgets after a price cut, you might be able to get a better discount from your supplier, increasing the profitability of each widget sold. This is part of something known as the economy of scale.
Price cuts or price increases?
Though people typically associate price cuts with increased trade, it’s also possible to attract more customers and achieve far higher profits, by increasing your prices. Yes, it depends on what industry you are in, but I have seen amazing results come from people, who have benefited massively from having an above average price tag.
For example: Around a year ago, a new bar opened in a town close to where I live. The owner decided to use her prices, as a way to position her bar. So, she opted to charge 20% MORE for drinks than her most expensive competitor. People said she was insane, as pubs and bars here in the UK have been really struggling in recent years.
This price increase was designed to act as a barrier to entry, to what she referred to as “the town’s drunks.” However, because these people kept away, her bar became a magnet for those looking for a more peaceful night out. She knew that people would be happy to pay the additional 20%, for a better quality atmosphere. 12 months later, she boasts the busiest and most expensive bar in the area.
Remember though, the bar owner did not just increase her prices for no reason. She was charging more BUT she was also giving the marketplace something of greater value than the increased price of her drinks. The value is what sold it – Not the price increase!
So, what about product sales? Apple Inc famously made record breaking sales and recorded the best trading period in the company’s history, during the height of the last recession. They did this, despite selling hardware that was often several hundred percent more expensive than other brands. They offered a great range of products, marketed them superbly and then charged for them accordingly.
Prices and promises
Before changing a price, always remember that your prices need to match your promises, if we want people to trust what you say. That’s because of the well established link between quality and price. For example, it’s unlikely that the best architect, web designer or lawyer in your area, works for the lowest fees. It’s equally unlikely that the best restaurant in town offers the lowest priced menu or that the least expensive homes are in the best neighbourhoods.
The marketplace gets very sceptical, when they see the promise of a great product or service, for a bargain basement price. That kind of mixed message causes confusion and as a result, it’s sometimes harder to win new business after lowering a price than it was before (depending on your industry.)
Prices and value
Your prospective customers want you to give them more value than they pay you for. So, you can either:
- Lower your prices and offer the same quality of service / product as you do today.
- Keep your prices the same BUT add more value, so they get more value for money.
- Increase your prices BUT pump massively more value into your service / product.
Here’s what doesn’t work though: Lowering your prices so that you are no longer profitable enough or increasing your prices, without pumping massively more value into what you are offering.
Pricing is a key part of your business and I have written about it many times. If you want to know more about pricing, value and how they can work for your business, here are a few links you will find useful:
How to set your prices or fees in 3 easy steps
I would like to know what you think about setting prices or fees and what your experiences have been. Please share your feedback with your fellow readers and myself, with a comment below.
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