Pricing strategist Jon Manning of Pricing Prophets is a veteran price-setter. He says that 80 per cent of businesses decide how to set their prices by working out costs before applying desired margins. Another chunk compare their offering with the competition and set prices that way, while the rest are consumer-driven, setting prices based on what they believe consumers will pay. But as Manning points out, customers don’t want to buy based on what a business needs to charge to stay afloat.
Impact on brand
Incorrect pricing can seriously affect a business’s profitability and long-term success, he says. “If you under-price, then you’re leaving money on the table when you don’t have to and also risk a supply shortage due to customers rushing in for a bargain too good to be true only to find that you don’t have the stock available or aren’t able to offer the service you promised them due to staffing issues.”
On the other hand, over-pricing can also affect a brand. “The risk there is that no-one wants to buy from you,” he says.
Businesses that over-price often feel they are superior in their category but can’t explain why, which can affect sales, according to Julia Bickerstaff, founder of Sydney’s The Business Bakery. Bickerstaff works with SMEs wanting to make sure their prices give them a competitive edge.
“Businesses can become so intent about their speciality that they lose sight of the fact that customers don’t need all the bells and whistles that they’re offering, and that they can sometimes be happier with the base model,” Bickerstaff says.
Pricing in a downturn
But pricing became an even more complex affair during the global financial crisis (GFC). Many businesses operating in both the product and service sectors understandably panicked and dropped their prices in the hope a fire sale would drum up sales. As a result, many are still trying to claw their way back to pre-GFC pricing levels. As many are discovering, dropping prices during the GFC was a false economy, Bickerstaff says.
“You don’t always sell more just by dropping your prices. And in many cases, this approach impacted prices and entire businesses far more than if they had held firm during the rough patch and just rode it out,” she says. Businesses that charged $100 and dropped to $80 during the GFC may now have increased their prices back to the pre-GFC price of $100, but if they had held steady during the economic crisis, they could now be charging $120, she explains.
[breakoutbox][breakoutbox_title]Benchmark your rates[/breakoutbox_title][breakoutbox_excerpt]Comparing your rates with others in your sector can help a business justify a price hike.[/breakoutbox_excerpt][breakoutbox_content]Comparing your rates with others in your sector can help a business justify a price hike. Research based on more than 70,000 real business service quotes submitted through ServiceSeeking.com might give businesses the impetus they need to increase prices. The site has 15,000 quotes posted on it every month and $1.5 million worth of work moves through the site daily. And while the prices quoted are typically lower than those sourced through other means due to the high percentage of freelancers quoting, it is nevertheless a useful comparison guide
Business accounting and advice
Average hourly rate – $60.50
Highest hourly rate – $154
Lowest hourly rate – $25
Average quoted price – $507
Bookkeeping
Average hourly rate – $38.17
Highest hourly rate – $66
Lowest hourly rate – $22
Average quoted price – $396
Brand specialist
Average hourly rate – $77.18
Highest hourly rate – $150
Lowest hourly rate – $22
Average quoted price – $1093
Advertising sales
Average hourly rate – $68.55
Highest hourly rate – $250
Lowest hourly rate – $17
Average quoted price – $9453
Internet marketing specialist
Average hourly rate – $58.60
Highest hourly rate – $125
Lowest hourly rate – $20
Average quoted price – $668
IT technical support
Average hourly rate – $79.65
Highest hourly rate – $165
Lowest hourly rate – $15
Average quoted price – $994
Average prices quoted between October 2007 and March 2010.
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Add value to your offer
Robert Gerrish agrees. The director of online micro business community Flying Solo says there are many examples of small businesses pricing their offering unwisely. The GFC prompted many in both the retail and service sectors to drop their prices, he says. “I can understand this logic to an extent. When the market is tough, people want everything on the cheap. Customers are certainly far more diligent during tough economic times when it comes to making a purchase and getting it for the right price,” he says.
But those who kept their prices steady and instead spent their energies trying to substantiate their business by using client testimonials or concentrating on reassuring clients that their business could be trusted fared far better post-GFC, he says.
“Smart businesses stay right out of the finance war and instead look at how they can add perceived value and take away any potential objections.”
This can be achieved by updating your website, having better quality business cards printed or repositioning your business in some way, he says.
“Money-back guarantees are also a far better reassurance than trying to compete on price. It’s a matter of building that trust.”
And while persuading businesses to adjust their prices can be tough, even a very small price hike can make a big difference to the bottom line.
The risk of a price hike
Bickerstaff was engaged to work with an exclusive restaurant in the eastern suburbs of Sydney that was making zero profit year after year. “They couldn’t carry on. It was just too stressful. Getting a consultant in was the last straw before they closed the doors,” she says.
Bickerstaff, who trained and has worked as an accountant, recommended a 10 per cent price rise across the board. At the end of the first year, the business made $500,000 profit.
And customers didn’t bat an eyelid at the price rises, she says. “Businesses always think customers are constantly comparing their prices against your competitors’, but the truth is that as consumers we don’t have time to be comparing prices.”
But a price hike can be a scary proposition in the current economic climate, admits Dr Greg Chapman, of Empower Business Solutions, who has self-published a book called How You Can Charge More Without Losing Sales. He says businesses are cautious about a price hike given that consumers are paying off debts, which has affected retail trade and also prompted businesses to put expansion plans and staff hiring on hold. “So many in businesses feel they can’t increase their prices right now given the economic environment, so it really has to be a strategic decision to do so.”
[breakoutbox][breakoutbox_title]Understand the figures[/breakoutbox_title][breakoutbox_content]A business with a current gross margin of 35 per cent must increase its sales volume by 40 per cent to maintain the same profit if it reduces its prices by 10 per cent. As a comparison, if the same business was to increase their prices by 10 per cent, they can afford to lose 22 per cent of their sales volume and maintain their profitability. Understanding this relationship and knowing that pricing is not usually the number one reason that consumers buy will enable a business to focus on strategies to maintain or grow margin, as well as focus on explaining the reasons that people should buy from them. These reasons could perhaps include things like product benefits, customer service, meeting customers’ needs and post-purchase services. If your business is and always was built on a discounting model, this needs to work for your business. Maintaining consistency in your brand and price positioning is the key when it comes to attracting and retaining customers, whether you are a discount or premium brand.
Source: Matt Schlyder, partner of Brisbane financial firm Elliotts.
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Build consumer confidence
Careful analysis of a business’s profit and loss statement may remove that psychological barrier of increasing prices, he says. “Once a business understands where they are making money and losing money, the hesitancy to increase prices could be removed. But either way, it’s a case of giving customers another reason to buy from you than just price.
“It’s about clearly communicating your point of difference and understanding that not everyone will value that point of difference,” Dr Chapman says.
However, businesses shouldn’t raise prices without firstly putting a few steps in place. If your business or brand is trusted by the public, price rises are far less likely to impact on people’s decision to buy – and therefore sales.
Dr Chapman says trust is paramount to cement with customers ahead of a price hike. “One of the biggest reasons that people don’t buy is a lack of confidence that you can deliver what you say you will. That’s part of what a brand does. If your brand is trusted, people are more willing to part with their money, no matter what the cost. This trust can be built via clever marketing.
“Generic sneakers might last you a month but Nike, on the other hand, is reassuringly expensive,” Chapman explains.
Choose the right approach
Timing can also play a crucial part in a price hike. The time to introduce a price rise is right when business is strong, Gerrish says. “You have far more control over the price you set when you’ve got a queue of people at your front door. That is the biggest sign ever that it’s time to put your prices up.”
Make sure you also stick by the mantra that all small businesses should live by, he says. “It’s vital to under-promise and over-deliver in small business.
“This means making sure that your house is in order before putting your prices up. Make sure your procedures and systems are spot on and that you can deliver what you promise,” Gerrish says. Remove some of the risk of a price rise by increasing prices in a particular section of the business and see how that works. Or, experiment with price rises online and leave in-store prices the same, says Bickerstaff.
“It’s about giving your customers options,” Dr Chapman adds. “Don’t be all things to all people, but consider if you could retain a budget price offering but also offer a premium product or service that focuses on the higher paying clients.
If you’re still unsure, consider setting up a price advisory board made up of an accountant, a marketing expert and the business owner, suggests Bickerstaff.
“Everyone will have different ideas, but together, you should be able to nut out the best approach to setting a price that’s right for you and your customers.”
Want more information?
- For independent pricing analysis, including rationale, upload your project to www.pricingprophets.com. Cost is $495.
- For more on Dr Greg Chapman’s book, go to www.increaseyourprices.com.au
