I know its not totally easy out their at the moment with the threat of more mortgage rate increases, but I bet there is something you could tweak with your pricing…….
Pricing is the single biggest way that you can affect your profitability without doing any work.
When you are at breakeven and put your prices up, then it flows straight down to the bottom line. It means more money in the business bank account for you to do what you want to.
We’re going to cover eight pricing mistakes:
1. Business owners use textbook formulas, industry norms, or other standard means.
So why is this an issue?
Well, quite simply, if you start copying people in your industry and what they do,
- Firstly you’re then like everybody else.
- Secondly how do you know that these people in your industry sector are actually making any money?
They’ve got different business models and cost structures to you. Their cost of operation is going to be very different depending on whether you work from home, work from an office. Do they have staff a lot ? A few? There’s so many factors
It’s never a good idea to copy what somebody else is doing because….
It’s a fact that 80% of any marketplace are either about to go out to business or are really, really struggling.
Clearly, you don’t want to copy those because otherwise it’s a race to the bottom and you’re not going to be able to do all the things that you need to do.
So I’d urge you to really think about your pricing strategy because in any industry sector, there’s only…
- 1% that are absolutely crushing it.
- 4% that are doing really, really well
- And 15% that are well on the way to being very successful
You’ve got to think really differently about your pricing and don’t follow how the crowd price.
2. People worry too much about their competitors charging lower prices.
- So you set an artificial barrier because you allow yourself to be constrained by what your competitors are doing.
- But of course, you have no idea how their business model is structured.
- You might have this view that they’re doing really well on lower prices than you, but of course you can’t see what’s actually going on in that business.
- You will struggle to get any real financial insight into that business unless they show you their P&L themselves.
You are just watching the exterior and the public facing marketing messages they put out and you have no idea what the reality really is!
You don’t know how much debt the company has got, what the director’s loan account looks like, what their cost structure is, and how much they pay their team.
So you make flawed decisions based on inadequate information from the company that you are effectively trying to copy and emulate.
We’ve already alluded to in last week’s email about…
Profit is, is POWER.
And of course, if you’ve not got enough profit in what you are charging and then you’re trying to reduce prices even more it causes all kinds of issues in the business.
- You can’t attract the right team
- You can’t afford to spend the money to get the new customers that you would need at the lower price to make your model work.
3. Attracting customers who buy on price.
Now, we’ve all tried to reduce our prices previously to attract more customers but then…
We attract the customers that do go after those cheaper prices and therefore they will also leave you on price.
They’re not loyal to you and that causes you all kinds of problems.
Every market does have these customers that is a fact, but obviously they are the least attractive customers for you.
You very much need to differentiate yourself and stand out against your competition so that you are not competing on price and people see the value.
Unless your price strategy is to be the lowest price all of the time, these people will leave you and go elsewhere.
So it’s a big mistake to make.
4. We predetermine what we think customers will pay.
Now this is a big failure when you are pricing because you have to remember that you are not your ideal customer.
You’ve always got to be thinking…
- What are the traits of my ideal customer?
- What would they do?
- And it’s very often not what you would do!
If we set this predetermined limit of what we think they will pay, we could be potentially missing out on lots of additional profit because actually they value your product or service much more than you do and they will be prepared to pay more.
You’ve then limited that potential profit by putting these predetermined pricing systems in.
Most people fall down by thinking what does the physical cost of that product or service cost to the business owner? And then they price accordingly and that’s not the value that’s actually being delivered.
So the big message is you need to think quite deeply.
You need to really understand your market, and what they value.
Think about how you’re going to price it
Also not just thinking about whether you are pricing it too low, but also thinking about are you pricing it potentially with barriers.
For example an organisation that used to charge a admin fee for turning up to events, it actually put people off. Now the business owner felt that it wasn’t an issue to charge an admin fee, but actually in reality it was. When they removed that admin fee, they actually sold three times as much training.
It does require quite a lot of
- Understanding your market
- Seeing what the data says.
5. Avoiding apples to apples comparison.
If people think your product is commoditized and they are getting exactly the same thing from one supplier compared to another, then they will try and compare on price.
- You need to make sure that you differentiate your product in such a way that they cannot be sure that they’re getting the same.
- You need to talk about it in a way that is very unique.
- You need to think how can I meaningfully make my proposition to the market very different to anybody else.
For example, as a printer, I get that it is very hard to avoid this comparison….although it is possible to do so. You need to offer your customers something that nobody else is doing or in a different way that makes them feel compelled to buy from you.
Most business owners talk about, I am a plumber, I am a printer, and they define themselves that way.
That makes it easier to do a like for like comparison.
Every bit of your marketing, your messaging, and your positioning is setting you up for a particular price that you can charge. It needs to be very different to everybody else in your industry sector.
It is down to insufficient differentiation and you do need to think, what can I do that makes us different?
6. Not offering premium pricing.
Some of your customers will pay more if you give them the chance.
Couple of examples here are…
- A fitness trainer
They are really bombed out before 8am in the morning, during lunchtime and after 5pm because these are the times when people who work want to come and use them.
So what the personal trainer can do is ultimately charge a premium price for those times.
- Universal Studios
People want to jump the queues and not have to queue up so they can get on more rides.
So, the way Universal Studios do it is they charge an extra amount on top of the cost of your normal pass so you don’t have to queue up, that way you go into a different entrance and get on more rides.
This is about knowing your customers, isn’t it?
Some people will not pay anything additional and they’re quite happy to queue go on less rides, but they still have a great trip to Universal Studios.
Others on the other hand want to maximize their time there because they might not be going back and create memories.
So to them, it’s absolutely worth it.
Universal Studios are open seven days a week. They have a thousand passes per day at $70. So that’s $70,000 per day extra revenue. It’s a significant amount of money per week and per year and it flows straight down to the bottom line because there’s no real additional cost. A tiny amount, but nothing much.
It flows straight down to the bottom line and it increases profit.
Now, I’m not saying it’s easy, but clearly there is a premium offering in your business and you just need to think deeply about it.
Not everybody will go for it, but the significant uplift it will give you in profitability is worth the time and effort to think about it.
7. Not increasing prices when it's relatively easy to do so.
So what do we mean by this?
It’s amazing how many business owners have never put their prices up or not put them up for a significant number of years.
A relatively modest increase will have a big impact.
For example, a membership organisation hadn’t put its prices up for small businesses for about eight years.
So what they did, they had 2000 customers and they wanted to in truth increase their revenue by around about £1500,000 – £160,000.
By putting their price up by £6 pounds a month for all of their 2000 customers, they got pretty close and a significant amount of that just flowed straight down to the bottom line because there was no additional cost.
Now how they did it, was they sent an email explaining that they were going to put their prices up, the email went out in February and the price increase started from April and most customers wouldn’t even notice that £6 pounds a month because it wasn’t particularly material.
You could do something like that in your business.
8. Poor self-esteem or business-esteem - a sense that you are not worthy
If you don’t get over putting your prices up then you end up settling for second best.
The business doesn’t have the money for you to live the life that you want to live and therefore you have to get over the fear that you are not worthy, and you can’t put your prices up.
When I speak to business owners they almost never say I don’t offer a great product or service. If you’ve got the evidence to back that up, then you need to be recompensed for that.