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Robert C. Brenner, MSEE, MSSM
©1998-2012 Brenner Information Group
Many shop owners are reluctant to raise prices. They feel that its much harder to raise a price than it is to lower a price. Since, about 72% of all consumer buying decisions are based on price alone, raising prices can be hazardous to your wealth. Yet, you can increase your rates if you do it wisely.
You invest in hardware and software to improve productivity and output capability, but you probably cant afford to implement added features or time-saving devices if doing so increases the prices you need to charge by 20% or more. You could find yourself with a terrific service but a need to charge much more to recover your investment cost within two or three years. The increase in price could exceed your the threshold of worth perceived by your customer. Theyll find your rates unacceptable and seek other alternatives.
On the other hand, many shops literally give away labor because theyre afraid customers will balk if they increase their rates to cover all costs. These shops lower their prices at the first hint of competition and feed price wars that pull everyones profit down.
If you cant make a profit with your current business formula, modify the formula or close your doors and sell out. If necessary, raise your prices to get a decent return on the financial and emotional investment that youve made.
Other industries consistently raise prices, sometimes not concerning themselves with the personal budget of their customer base. Consider the service rates at your local car dealership. Consider the price increases for theater and ball park tickets. How about the recent pay telephone and rate increase? Prices are going up everywhere. Dont avoid raising your own prices when it makes good business sense.
A price can appear high or low depending on the perspective of the person making the evaluation. For the prospect, it depends on other available prices and the benefits expected. It also depends on the perception. Nordstrom is perceived as a high quality and high service department store. Price Club is perceived as a low-cost, low-price outlet. Both of these organizations work hard to promote this image. Yet you can sometimes find lower prices at Nordstrom than at Sears. And you can sometimes find higher prices at the Price Club than at Home Depot. Low price leaders don't always offer the lowest prices.
Raising prices can attract fewer customers but generate more profit. Lowering prices can crowd the shop but generate little profit. Pricing requires a combination of art and science.
Whether raising or lowering prices, you can not afford to be erratic. Dont change prices often, but when you do, do so from a sound business basis. Successful consulting firms know that charging fees in the upper range of a market can generally be very successful. Underpricing can produce an image that your shop lacks the skill and experience to command higher fees. It can also suggest that your shops service will be of lower quality than the more expensive shop. Given supply and demand, you must decide when and if a price increase is warranted.
When do you decide that a 6% profit margin is simply not enough and raise your rates? By gauging your pricing to a customer's perception of your worth and to their ability to pay, you can successfully work in a rate increase.
Price moves must be carefully planned and executed to avoid alienating customers and attracting added competition. The higher you raise your rates, the more youll entice competitors. Your pricing strategy can place a lid on temptation for potential competitors. If the temptation becomes too strong, this lid is pushed away and new competitors appear. Your existing competitors could also decide to add resources to compete in your market niche.
How much can you raise prices? Finding the reasonable point of acceptance/resistance is a challenge. It involves knowing your market, knowing your competition, and knowing the price elasticity in your area. A small increase of $5 an hour may be palatable. Raising your rates $10 an hour may be too much. If you decide to raise prices, make the increases small. Once you've developed your products or services, a 1% increase in price can equate to a 10% increase in profit. Unless your hardware and software configuration changes, theres little added cost in raising your price. Any increase goes immediately to the bottom line.
However, if youre business is evolving rapidly, shift immediately to a well-researched solid rate regardless what increment increase you determine is appropriate. Just be certain that your customers still perceive sufficient value in your services. If your analysis suggests a $15 an hour increase, immediately incorporate this price change. Most experienced business owners recommend that you avoid step increases because these can cause confusion. If you can justify the increase, and if youve notified your customer base, boldly move forward and change your rates. Be certain to update your signs and price sheets.
Some shop owners say that a price is right when 20% of your customers complain that youre too expensive. An average price increase is usually between five and 10 percent.
Don't raise prices across the board. Your best approach is to conduct a product-by-product, service-by-service analysis. Then selectively raise those prices that warrant the action.
Shop owners sometimes unbundle their services to give the appearance of lowering prices. They also charge for every function that they perform for a customer. No service is given away. The customer is charged for every effort they make on the customers behalf.
Their pricing formula includes the flexibility to lower price when negotiating a job or promoting a sale. They also price based on the urgency of response. Often they offer several levels of service with unique prices for each level. A shop may charge $40 an hour for one day service, $50 an hour for four-hour service, and $80 for one-hour service. Time has value.
Dealing with new customers is relatively easy when youve raised prices. But shop owners often struggle with the mechanics of communicating a price increase to current clients. Some owners send a warm, personal letter to each current customer reminding them of the successful projects that were supported in the past. Then they inform them about new upgrades (software, hardware, etc.) to provide better, faster service. They explain that inflation is causing higher operating costs, or that materials costs have increased. Then they announce a small (typically no more than $5/hour) rate increase. They set the effective date for the increase about four weeks ahead to give their customers time to take advantage of the current lower price. They reassure their customers that they will continue to bill at the old rate for any projects started before the price increase takes effect. Then they assure their customers that they value their business and look forward to new and challenging assignments in the future. Some shop owners include a paragraph that mentions projects that a client has talked about and may want to initiate right away.
Another approach is to raise prices without advising your clients. This approach assumes that you quote a job based on a flat rate and include added charges for changes or alterations. In this strategy, you don't worry about what new clients will think of your higher rates. Most will not be aware of the old rates. If they are referred by another client, explain why your rate increase was necessary. This means that you must develop a palatable reason for the increase.
Quoting your new hourly rate in a letter may turn away major clients who are not comfortable paying $70 an hour but who can accept a flat-rate estimate or a daily or weekly rate. Hourly rates scare some customers. These people are simply not comfortable working with professionals who charge by the hour. For these folks, its better to put a job into acceptable perspective by expressing their cost as a total package price.
There are other advantages to quoting jobs on a flat rate basis. Flat rate pricing lets you build in fees and charges that would stand out like a sore thumb when individually listed on a counter price sheet. If you quote your customer a price thats 25% lower than what they can find elsewhere, you can incorporate a price increase while still giving the impression that the customer is getting your services for peanuts.
There are also subtle ways to increase prices. You can eliminate discounts and reduce credit terms. Changing the payment terms from 30 days to two weeks will cause a noticeable increase in your cash flow position (effectively increasing profit).
There is an emotional sensitivity to price increases. The only way out of price-only scenarios is to increase perceived value. Value is like beauty. It's in the eye of the beholder.
As you consider increasing prices, your mind can generate objections. You may think: Ill lose customers, The customer buys on price alone, not quality, My quality isnt high enough, so I need to discount my price, I'll lose long term business, or The competition will eat me alive.
You need to understand why a price increase is necessary. You need to openly and honestly analyze your pricing strategy. Then conduct an objection clinic with yourself or with your employees. Using role playing, imagine objections that a customer might express. Then develop counter arguments to each objection. This role playing exercise is helpful in getting you and your staff comfortable with a price increase. It also prepares you to make your customers comfortable with the new prices.
The goal is to handle objections before your customers have an opportunity to think of them. You want a strategy that lets you make benefits so clear that price is not a dominant factor. You want the prospect to make apple-to-apple comparisons. Then you want to show them how the benefits that you offer are worth their investment. For example, show them actual display ads that you've designed that jump off the printed page to catch a reader's eyes. These ads should draw more response. Explain how the work that you've done has helped other customers win large contracts or sell major products. Combine benefits with price and then minimize the difference and emphasize service. Show how the price is insignificant over the application life of the design or other output that you'll provide.
If a prospect asks for price before you finish covering the benefits, combine your response with other benefits that you havent mentioned. Keep focusing on benefits. While some customers sniff at the lure of a competitors lower price, dont bait the hook. Set your prices for maximum profit. Enough rays of business sunlight will shine through to bathe you in income brilliance.
If your competition lowers their prices, dont roll over and play dead. Nor should you immediately lower your prices. Instead, send each of your customers a letter sharing your business strategy and why a lower price is not necessarily the better choice. Emphasize value, emphasize benefits, and emphasize professionalism.
Being swamped with business is another reason to raise prices. Eighty percent of your profit typically comes from 20% of your services. Identify your own 80-20 formula and then focus on the 20% yielding the most profit. Profit margins are improved by increasing sales in services with the greatest differential between costs and selling price. Increase the differential and you increase your return. Raise prices to weed out bargain hunters and you can realize more profit per hour per job.
Theres one more benefit to smart pricing. Use price as a tool to open time windows for non-business, non-stress activities. By raising prices you can hold the high-margin customers and do a profitable business in an eight-hour day. By working smart, not working long, you gain control over your own financial security, free time, and business fulfillment. So, price for profit and price to what the market will bear.
Small Business Guide to Pricing is available for $34.95 (printed plus sales tax) or $24.95 (PDF emailed to you without sales tax or shipping).
Pricing Tactics is available for $14.95 (printed plus sales tax) or $99.95 (PDF emailed to you without sales tax or shipping).
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revised May 2012