6 Clues Your Pricing May Be Too Low
Content was originally published on Inc.com on November 19, 2015.
Mark, one of our business coaching clients, ran a successful service business with sales in the low 7-figures.
He had a loyal customer base, a solid team, and growing sales. But his profit margin had been stuck lower than he felt it should be.
After looking at his financials and doing a deep dive into his company we spotted the likely issue – his pricing was too low.
Mark’s first reaction to observation was fairly typical, “What do you mean my pricing is too low? We couldn’t charge any more, we’d lose customers.”
Waiting out his first reaction we followed up with a few questions.
“Mark, how did you come up with your pricing?”
Mark’s answer was also very typical, “We started with our original pricing set at just a little less than our competitors back when we first started the business 10 years ago, and every couple of years we raise the pricing a few percent.”
Most businesses set their prices when their business was first launched, and since they were so hungry for business, they set pricing levels low.
Over time, the business likely only made nominal increases to pricing every few years, but rarely did the owner ever sit down and fundamentally rethink his or her pricing model.
I’ll share with you what we suggested Mark do in a moment, but first, I wanted to share with you six clues that your pricing may be too low, giving you a real opportunity to become more profitable.
- You price in relationship to your costs.Obviously your costs matter, but the most successful companies price in relationship to value. What is the cost of the challenge or problem that your product or service solves for your customers? What is their cost of the “status quo” (i.e. of not buying your product or service.) What is the potential gain or benefit that your product or service will deliver?When you work to price more in relationship to these factors you’ll often recognize your current pricing is too low.
- You price in relationship to your competitors.Of course you are competing in the context of your competitors, but do you really need to be the lowest cost provider? Again, go back to value created versus focusing solely on the commodity-evaluation of your price next to your competitors.If you offer more value (e.g. better service, higher quality, more customization, etc.) then don’t be afraid to charge for that extra value.
- You provide a value offering that your competitors can’t.The more you are able to provide your market with solutions that other companies can’t, the greater your ability to price in relationship to the true value of your solution instead of the race-to-the-bottom commoditization that so many businesses suffer from.
- You haven’t raised prices substantially on your older “legacy” customers in some time.I’m not talking about nuisance raises here, but rather, if you haven’t raised your pricing in a while you will often discover that your pricing with your older customers is unfairly low.
By all means, honor your relationship with your customer. But also be fair and smart in looking out for your company’s interests too.
While some business owners fear increasing prices for loyal long-term customers, the truth is that customers fear “switching costs”—the cost to leave you, train a new vendor, and go through the whole learning curve all over again with someone new. Often the switching cost is higher than your increase in prices, so they won’t leave you just for making changes.
- You have limited production capacity and a large and hungry demand that exceeds your capacity to produce.
Simple economics say that limited supply with increase demand means prices should increase. So if you can’t easily scale your production capacity (which I’m hoping you can) then use pricing to address how you best serve customers in the face of a limited supply.
- Your price is well below market without a compelling reason for it to be so low.
So what did Mark end up doing? He decided to do an across the board 8% increase in pricing (we suggested an even greater increase but he wasn’t ready to swallow that one.) None of his customers said a word; all of them stayed with him.
That 8% increase was pure profit for him since he had already been covering his cost of goods sold and his expenses.
So what are you waiting for, take a closer, strategic look at your pricing today.
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