By David Gregory
Pricing is often deemed as a black art. It creates fear in the hearts of business owners and a sense that it alone will decide on the success of their business. The reality can be quite different.
I recently met with a business that told me he had “never” put up his prices for existing customers. His belief was that he would lose the customer, if they had to pay more. When quizzed on his customer base, he said that many had become like friends and that they all loved his service, but he was afraid of losing them.
Progressively he had to keep tabs on the prices he charged because they had become different for each customer depending on when they had begun buying from him. It had become a real headache to manage.
The reality is that the customers would expect prices to rise and as a business owner, you have to train your customers to appreciate the value you provide over and above the prices.
Part of the approach is to test price elasticity. This is a term that reflects on the degree to which the market will accept price change before reacting against the product or business. Most businesses don’t realise how diverse the pricing within their industry can be. To test the market, all a business needs to do is ask the question. Call your opposition and ask for a quote. Drop into an opposition’s business and look at their prices. Speak to the salesperson behind the desk and ask what they charge. While this seems simplistic, very few businesses actually do regular market research. As a result they are robbing themselves blind in the process.
Statistically, most customers of small businesses will accept an increase of between 5 and 15% without falling off their chairs in dismay. For a business with a large and diverse customer base, it is possible to test the impact of an increase by targeting a specific low risk group. If the prices are accepted, then expand the increase to the next group. For businesses with a smaller base, perhaps a staged increase starting at 5% is an easier entry point. The critical aspect is to start. A business needs to establish a regular approach to their pricing aligned with an ongoing understanding of what the market is doing.
For small business an approach of regular small increases rather than doing a substantial irregular increase is far more appealing. To this end, set yourself a timeframe. Have it diarised that each year on the 1st of July I will put my prices up. Then stick with it.
Advise the customers as part of the process. “Our annual price rise will take effect on the 1st of July, come in now to take advantage of the current prices”. This approach not only trains the customers to expect an annual increase, but also creates an incentive to buy now.
Now that you have made a commitment to yourself that price increase will happen and you will manage their implementation, let’s address your fears.
Many regular customers do not buy from you because of price. Price may have been a factor originally but they have become regular because of:
- your location
- your service
- your quality
- your range
- your uniqueness.
As a result, they will not leave for the devil they don’t know, for a measly 5-10%.
Secondly, many business owners won’t raise prices out of fear of telling their customers. You simply have to bite the bullet and tell them. Where possible, tell them ahead of the price rise, but if not possible, don’t apologise, just tell them. You will be surprised at how many will just shrug, or say “about time”. They want you around so they can buy from you again. As such, they expect you to make a profit.
The greatest challenge you have to overcome in putting up your prices is you and your confidence to do so. Believe in yourself and your product or service. Your business and your customers will be the beneficiaries of your confidence.
David Gregory is the CEO of the Small Business Mentoring Service www.sbms.org.au , an organisation that has supported thousands of small businesses for over 25 years. SBMS has over 140 Mentors in Victoria and NSW. He is also the Founder and CEO of The Small Business Institute. www.tsbi.com.au
SUBSCRIBE TO OUR NEWSLETTER