Why raising your prices will not be the end of the world – Part 1

As accountants we focus on giving added value to our clients. Getting your pricing right is the first step towards making your business more profitable. But so many of us get our pricing wrong, or simply don't place the right level of importance on achieving a sensible pricing strategy.

So, what is the right fee to charge for your products and/or services? And why do so many businesses shy away from increasing their prices to a more profitable level?

Let's look at why a value-driven price is always better than a cheap price.

The cheapest price point isn't the best strategy

It's a little short sighted to focus on advertising your business as the cheapest option in the marketplace – and there are a number of reasons for this:

  • You might not be the cheapest in the market – have you actually checked?
  • Pricing your goods or services this low could significantly hurt your profitability.
  • The outcomes of a cheap price are counterproductive to the positive results you're aiming for as a business owner – it's much harder to meet your goals with an economy price in place.
So, if your philosophy on pricing strategy is still 'Be the cheapest, make more sales', you're going to make it harder to achieve positive results when it comes to your next profit forecast.

Should you raise your prices?

So, if opting for the cheapest price is counterproductive, should you be increasing your prices as soon as you can?

The answer is that sudden increases in price work better for certain industry types. It's all comes down to what you sell, who you sell it to and how willing that customer base will be to suck up a few more dollars on your old price.

Manufacturing and product-driven businesses may find it harder to increase their prices without a negative impact. When your customers are bulk buyers with tight margins, or consumers with limited cash in their wallet, you need to be cautious about how high (and how quickly) you raise prices. Too high, and too fast, and you're likely to lose customers – and that has a painful impact on your sales and profits.

High skill service-based businesses have a better chance of increasing price, without there being a related drop-off in customers. If you're offering a high level of expertise and knowledge to your customers, they're far more likely to place value on this service, and to be open to price increases.

Lawyers, doctors, architects, web designers and technology companies are all examples of businesses that deliver a key service, that's driven by a perceived benefit. As a medical professional, or a specialist in website design, you have a service skillset that customers actively see a benefit from – and when you make yourself invaluable to a customer, they become more flexible around the price they're willing to pay. In short, when customers are not willing to lose your services, you can be a lot more adventurous with your pricing.

What pricing strategy should I use?

There's a wide range of different pricing strategies to choose from, and the pros and cons of each will depend on the type of business you're running. So let's have a quick look at the main kinds of pricing theory and how they work.

1. 'Penetration pricing' focuses only on cost. The only attribute you advertise and that matters to the customer is your price. Over the very long term, it's nearly impossible to succeed with this strategy. That's because for you to consistently offer the lowest price, you need to consistently have the lowest production costs in your industry. (Note the distinction between price and the cost of providing the product/service.) Why is this so hard? Because even if you have a temporary cost advantage, your competitors can copy every cost saving strategy you employ. Walmart and Southwest are two of the few companies that have made this strategy work over the long term.

2. 'Skim pricing' aims for a premium price and less overall sales. It's a model you'll know from brands such as Apple (think MacBooks, not iPhones) or Mercedes. This pricing strategy aims to present an exclusive brand that appeals to a small and highly selective customer base. Apple is only selling a small fraction of the computers in the world, but its capturing nearly all the profit in the computer industry. In general, this is a difficult strategy to succeed with, but your odds are better than using a penetration pricing strategy.

3. 'Neutral pricing' if you're not opting for the first two options, you're going to fall somewhere in the neutral ground between them – and that's what many businesses currently do. You're not the dollar store option, and you're not the aspirational premium option – you're focused on balancing a competitive price against a profitable margin. Most businesses use this method as a default strategy, not as a deliberate pricing strategy.

So why are we all just playing it neutral and hoping that the unpredictable competitive/profitable balance works out for us? This is the point where you're probably thinking, 'Only three pricing strategies? Surely there's another option.'

Value pricing – a better way to price

No prizes for guessing that there IS another answer to the pricing problem. And it's based on getting a proper understanding of the value you bring to your customers.

Nimbus Integration is mostly a service-based business – I bring my accounting and technology expertise to the table and that's what my clients expect me to deliver. It's also what brings my clients back year after year – they feel the benefit to their business and they place real value on the service they receive from me.

When businesses choose to price low, it shows – a distinct lack of belief in their service, their value and the loyalty of their customers: cheap pricing = no loyalty. It's far better to focus on knowledge, expertise or speed of service: anything that helps you differentiate value that's based on a selling point, rather than price.

Putting value pricing into action

Price isn't something we automatically think about when it comes to innovative new business strategies. But pricing really is at the heart of making your business work – and that means going beyond the traditional pricing models to explore the value that makes you stand out in the marketplace.

In part 2 of this blog series, I'm going to dive into more detail around value pricing and how you get to understand it, implement it and enjoy the positive boost it gives to your brand and your profits.

If you're already interested in getting a handle on your profit margins and key numbers, take a look at our 'Problem areas' page to see how cloud tech is making it easier than ever to control your financials.

Find out more about how tech helps solve your profit problems.


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