Dear Dan: The last time I tried to raise prices it was a disaster. Customers revolted. But I've cut costs as far as I can, and profits are too thin. How can I raise prices and not lose business? - Once Burned, Price Shy
Dear Price Shy: Millions of small business owners across America seem convinced that raising prices in a bad economy is financial suicide. Held hostage by industry pricing and recession fears, many business owners believe that working harder and earning less is the only way to survive.
But that's wrong, says pricing specialist Dale Furtwengler, a CPA and president of Furtwengler & Associates, a pricing consulting firm. Cutting costs is like dieting. It rarely produces lasting results. Furtwengler contends that the economy isn't the issue. Rather it's the inability of most small business owners to understand the value in what they sell, to make changes if necessary and communicate that value to customers.
In his new book Pricing for Profit (AMACOM), Furtwengler lists four false"reasons why business owners say they can't raise prices. He claims all are invalid:
- We don't have the name awareness of the big boys.
- Our customers only care about price.
- Out competitors won't raise prices, so we can't.
- We'll lose sales and market share.
The real reason that small business owners stand pat on prices is that they don't know how to monetize the intrinsic value of what they sell. If your profits are being hurt by low prices, here are some things you should know and do:
Survey your customers. Distinguish between those that are "price" buyers (only interested in lowest price), and those that are "value" buyers (willing to pay more for value such as convenience or service). Recognize that not all customers are equally valuable to your business. Then identify and target your ideal customer. These will be your most receptive buyers, and the ones to target with your value proposition.
Listen to customer requests: Are the things they are asking for minor conveniences they'd enjoy? Or are they actually improvements you can make that they'd pay extra for? "The key is to ask for compensation for each of the requests that customers make," says Furtwengler.
Calculate value of your products and services: Customers value speed, friendliness, integrity, dependability, convenience, image, service, innovation and knowledgeable salespeople. Boil this down to three -- image, innovation and time savings -- and attach a hard number to each of these. According to Furtwengler, the average "image" buyer will pay 5-10 times the lowest price alternative, while "innovation" early-adopters will at least pay 2.5 times what other buyers will pay. And experience shows that retail customers will pay 2-3 times as much for something that saves them recreation time as they will for the opportunity to make more money. Business buyers want you to help them increase revenues and productivity, and cut costs.
Avoid price language pitfalls: Many small businesses hurt themselves by using words that diminish value in their ads and other marketing messages. For example, phrases such as "lowest price around," "guaranteed low prices" or "good value for the dollar" give buyers the impression they're giving something up, says Furtwengler. Why? Simply because the vast majority of buyers expect to pay more when the value is higher. Use language in your marketing messages that is customer-focused, results oriented, exciting and appropriate for the value that your business provides.
Price for bad times without compromising value: You can do that by asking your customers what concessions they are willing to make in return for a lower price.
Bundle up: Bundling products and services is a time-tested approach that really works for companies of all sizes. It sweetens the deal for customers while increasing your average sale and profits. Bundling also increases employee productivity and lowers your risks. According to Furtwengler, the key questions to ask in establishing an effective bundle are these:
- What are some of the challenges these buyers face?
- Can bundling help them overcome these challenges?
- What could I bundle together to make life easier for my customers?
- What benefits would they gain from these bundles?
- What benefits would I gain from these bundles?
- What scripts would I use to communicate these benefits to my customers?