The quickest way for any business to make 10% more profit each year is to put its prices up by 10% each year. But if it were as simple as that, then we’d all doing it, wouldn’t we? The reason we don’t make regular price increases is that we have the fear that if we do so, we are going to lose our customers.
Feel the Fear, and Do It Anyway!
However, like most fears we have, when you analyse it, this is merely “False Expectations Appearing Real.” In fact, in any market, you can and should increase your prices. If you know how to do it properly, you need never be fearful of losing a single customer.
The first thing to understand is that you must know your numbers. If you do not understand your own profit and loss account, know your gross profit from your net profit and what products make money and which do not, then you are right to be fearful.
Do the Maths!
Without this knowledge, you will not know where to start, and you could find you are increasing prices in the wrong area of your business. Does your accounts system that tracks these important figures? Do you have detailed analyses of what you sell and how much it costs you? If not, before you read any further, you need to book a meeting with your accountant! Once you have this information at your fingertips, then read on!
OK, so now I will assume that you are financially literate, or at least you’re reading this with your accountant by your side. Your next step is to understand the impact of price increases on your business.
Consider the following: if a company making a gross profit of 30% were to increase its prices by 10%, it would have to lose 25% of its customers to be financially worse off. Yes, you read that right! In fact, if 20% of your customers objected to the price rise of 10p in every £1 and went elsewhere, then you would still be better off putting your prices up. And even better, if you were to raise your prices by a higher figure, say by 30%, you could afford to lose 50% of your clients. Just think of the time and effort you would save!
If you don’t believe me, work it out for yourself, then read on! (And if you can’t work it out, then you need to go back to your accountant!) Obviously, if you have higher or lower gross profit margins, the figures will be slightly different, but the concept will be the same. (If you would like a ready reckoner that shows these figures for all prices rises and margins then just email me.)
The Added Bonus
I have been working on this one strategy with my clients for 10 years and in all that time, the average loss of customers from a price rise is 1-2%. But as every cloud has a silver lining, there could be a hidden bonus for you in losing some customers! Generally, the customers that do leave as a result of a price increase are the bad ones. You know – the ones that have always quibbled about price, never pay on time, cause you stress and grief and use up time that should be spent with your top customers.
By losing your worst clients, you can spend more time on your best clients who will in turn buy more from you and stay longer. And there is a further bonus in that these bad clients that leave you go to your competitors and make their life hell instead! So you really can’t lose.
OK, you still may not be convinced by my argument and think that there must be a catch. Well, for some of you, actually there is no catch. If you only have a few products or services, you really believe in them, you give good value and have a good relationship with your clients, you can put up your prices tomorrow. I helped one service provider client do this and we doubled the profitability of his business virtually overnight.
The Strategic Approach
Some of you however may need to adopt a more strategic approach to price increases. Do you have multiple products and services which are more commodity-based? Is there little customer loyalty in your market? Do you have high price sensitivity and competition? For your business, an across the board price increase is probably not appropriate.
Rather than increasing all your prices, you need to work out which products and services you should increase, and which you should leave alone. As I said above, you have to know your numbers, but this time down to a product line margin basis. Then you need to look for those products that are going to meet one or more of the following criteria:
- High sales volume – so that a small increase per unit can have a big effect (e.g. 1p on a litre of petrol)
- High ticket price item – so that a reasonable £ increase is a low % increase on the price (e.g. £5,000 on a new Ferrari)
- Highly differentiated product – where you can show a real point of difference that will justify a higher price (e.g. Apple’s iPhone)
- Low access to knowledge – where access to competitors’ price and offering is harder to find or is confusing (e.g. energy tariffs)
- Ability to reposition – turn your product/service into a basic/better/best, so the basic competes on price and the others on value (e.g. Tesco’s value and finest range)
- Add-ons – have a basic range and charge for extras (e.g. BMW & Mercedes).
This list is not exhaustive, but I find with my clients I rarely need to go beyond the basics to make a difference, and what a difference – for every £1 on the price, 100% goes straight to your bottom line! So go on, take ACTION and put up those prices – just warn me first so I can get my order in before you do!