Should You Raise Your Prices?
When I first met my wife Karen she had a job at a local butcher shop. The owner’s name was Fred. He was a master at pricing.
He always positioned himself at the main cutting table with the butchers to his left and the meat display counter to his right. Fred was right there should anything need his attention; he could also keep his eyes and ears on everything. He regularly heard his customers talking about his prices and they didn’t know it.
Like most good philosophies his concept on pricing was simple. “Everything has a magic price” he used to say. You should adjust until you hit the sweet spot. That’s where you sell just the right amount of everything to maximize your revenues.
When you think about it his pricing challenge was actually quite difficult. If the chicken breasts were priced too low – they would really move – and then he would wind up having to drop his prices on thighs, legs, and wings so they would move at the same rate. Should they not sell fast enough he might have to dispose of them.
Fred also had more than chickens to consider. He had sides of beef and pork products to price. It was, and still is, a busy butcher shop. Raising and lowering prices was a continuous activity for him.
His pricing also considered the twelve employees who worked for his company. Fred wanted to pay them well enough so they could comfortably support their families and enjoy life. His company had also just purchased a brand new retail store and the pricing had to be able to make enough money to cover the cost of that. A lot depended on Fred’s “magic pricing” strategy.
Pricing is one of the most critical issues for company owners. It is the key to a successful business model. Owners need to regularly ask themselves: should I raise the prices? Sometimes they resist increasing prices because they believe that customers are hard to come by and they worry about losing the ones they already have.
The problem with setting prices too low is that it becomes very challenging to operate a company when you’re constantly leaving money on the table. You could be slowly squeezing the life out of your company.
How will increasing your rates impact the ‘busy-ness’ of the business? If you introduce a ten percent increase and ten percent of the clients leave then you’ll earn approximately the same revenues for less work. That’s not too bad. Chances are the customers who disappear aren’t the ones that you liked serving anyways. On the other hand, you can’t move them too high because even your good customers will stop buying at some point. Like Fred, you need to be looking for your “magic price.”
Grinders Don’t Care About Your Company
Grinders are one of the reasons that small business-people are reluctant to increase their prices. These people seem to make it their life’s mission to put small company owners out of business. They always say everything costs too much and they make the same complaint everywhere they go. Grinders are often loud and annoying and that doesn’t end when they make the purchase. After-sales service can be very challenging. There appears to be way more grinders than there actually are. To try and save a buck they’ll contact a lot more companies than the average consumer does, this causes the illusion. They’ll even burn ten dollars worth of gas to save five bucks, but that’s a different story.
Every small business gets more than their share of them. They don’t really bother big companies though. I’d like to see one of them go into Starbucks and offer to buy their coffee if they match McDonald’s price. How about going into the Ritz-Carlton and asking for the Super 8 rate? I’m sure that will go over well.
Fred was a rare individual. He was friendly and grumpy at the same time. He didn’t have a lot of respect for grinders. He understood that the success of his company relied on his pricing. I can’t even guess how many times in his forty-year career as a butcher he asked himself: should I raise my prices?
Entertaining the Question: Should I Raise my Prices?
When you set your pricing you need to consider the ongoing health of your business model. Are you going to be able to pay your key staff well enough to retain them? Will your company be able to earn enough profits to invest in future growth? Are you yourself going to be paid well?
If you think that dropping your prices will increase sales and hopefully profits as well then you should be careful because the lowest price strategy depends on having the lowest costs. Big box stores are infamous for beating down their suppliers. If you adopt this approach you most likely will have to become a grinder yourself.
If you plan to compete on price, but you don’t have the lowest costs you are setting yourself up for a hard and difficult journey in business and it probably won’t end well. Constantly asking yourself how can I lower my prices instead of should I raise my prices is a strategy that bankrupts a lot more business-people than it rewards.
It’s possible to be even-handed in your pricing strategy. Some items on your ‘menu’ could be raised while others are lowered. If you have a large ‘menu’ it’s highly likely that some adjustments should be made somewhere.
It’s also a good idea to secret shop your competitors to find out where their pricing is at. If you discover there’s a range of strategies then take the time to look around and see which companies are more successful. Are they the ones with the lowest prices or the highest?
It’s often a hard lesson to learn, but money is not the only factor in most purchasing decisions. Initially when you start asking yourself the question: should I raise my prices it will take you out of your comfort zone. It’s also likely to give you a healthy fear. It may challenge you to improve your company’s service or increase the quality of your products. Alternatively, it may prompt you to adjust your marketing so you get a better shot at the higher-end business. These are all good things.
If you increase your prices it can make all the difference in the world. I know a company owner who increased his prices by ten percent and his business went up by twenty percent. Only half of the gain can be explained by the price increase. The other half was caused by a combination of other factors. He believed that they had to justify the increase so he improved the way they explained their value to their customers.
Also, some of his prospects previously took their business somewhere else because they thought his quotes might be too low for him to complete the work properly.
It’s a good idea to schedule regular reviews of your pricing strategy. Follow Fred’s lead by making “magic pricing” a regular activity. It can bring you great results. Experiment a bit, take a few acceptable risks at first, but entertain, I mean really entertain the question: should I raise my prices?
Fred brought in a partner and then retired. His partner, in turn, brought in some younger partners and the company continues to create great lifestyles for the owners and staff. The benefits of a good pricing strategy can last for generations.