The Power of Pricing your Products and Services Correctly

Without a doubt, pricing is the number one factor in determining the profitability of your business. 

Get your pricing right and you go a long way towards ensuring the success of your business. 

Get it wrong, however, and you face a long hard road just to keep your business afloat.

Warren Buffett, an American business magnate, investor, and philanthropist believes,

The single most important decision in evaluating a business is pricing power”.

If pricing is so important, why is it that when we work with clients to improve their businesses, the area that we get the most push back on is the pricing?

Why is it so difficult to even entertain the idea of raising prices? After all, the costs of running your business go up every year.

Although our clients don’t come right out and say it, the overwhelming reason why raising prices is such a taboo subject is fear: fear that they will lose all of their customers or clients and therefore their business.

Whilst there are certainly some businesses that are price takers in their market i.e. where the market or legislation sets the price and they have no discretion in setting their prices, the vast majority of businesses can set their own prices.

What business owners need to understand is that people do business with you based on a number of factors, of which price is just one:

  • Convenience
  • Service
  • Personal Relationship
  • Habit
  • Quality or suitability of product
  • Price

If price was the only factor, Coles and Woolworths would lose all of their customers to Aldi for their lower priced grocery purchases.

Obviously if your product and service is lousy you had better be cheap, but I think it’s safe to say that if this was the case, “cheap” isn’t going to save you and you wouldn’t be in business for too long anyway.

So how do you know that you’ve got your prices right?

Here comes the tricky part; you don’t.

Pricing is not an exact science. If it was, you wouldn’t be able to buy the same bottle of water for vastly different prices depending on where and when you buy it.

We work with clients to help them determine the correct pricing for their product or service.

Two of the most important question we ask are:

  • What is the market charging for the same product or service and where do you fit in the market compared to them?
  • When was the last time you increased your prices? What happened?

We help them to deal with their fear of losing customers by showing them the numbers surrounding the price increase. 

For example, if your margin is 33% and you increase your price by just 10%, you can afford to lose nearly 24% of your average customers and still be no worse off. If your margin is 20%, you could lose one-third of your average customers.

So, here is our challenge. If your last price increase was more than a year ago, there’s a good chance that you should increase your prices, at least on some of your products or services.

Review each of your product lines or service centres. 

Conduct a review of the market to see what others are charging. 

Dip your toe in the water by increasing the price of just one product or service.

A client of mine, a fish and chip shop owner was reluctant to increase his prices for fear of losing customers. I convinced him to increase the price of his most popular “meal” by just 10% just to see what would happen.

Nothing. His regulars were still his regulars and not one complained.

He increased all of his prices very quickly after that and his profitability soared.

Maybe it’s time for you to get some advice on setting or reviewing your pricing,

Contact us on (07) 5522 8400 for a free chat anytime.

OR Learn more here about comparing your business to other businesses…

Do you know what benchmarking is?

Benchmarking is where you compare the results of your business, usually its critical success indicators, with other businesses of your size in your industry.