Why would you increase your sales price?

1. You have been under valuing what you do for too long, and the price no longer covers costs;
2. You want to decrease the number of clients and have a strategy to price buyers out of your market;
3. You have added extra value to the product or service offering;
4. Production costs have increased;
5. Building a brand around exclusivity;
6. You need to increase profit; or
7. A myriad of other possible reasons.

In all cases, it is important that you know your numbers before you embark on a plan to increase prices.

Before adopting a strategy to increase prices you must examine your numbers to fully understand how much sales could decrease before it impacted on your gross profit position in dollar terms.  This is your tipping point – the point at which the new sales volume does not generate an increase in gross profit.

Consider this scenario. 

If your current Gross Profit % is 35% and you increase prices by 10%, your sales could fall by 22% without eroding your Gross Profit.  Your tipping point is 22%.

With this knowledge, you can ask yourself – am I confident that a 10% price increase will not cause sales to fall by more than 22%?

This is important because anything more than a 22% decrease in sales will result in an erosion of gross profit.

Of course it is possible that sales volumes will increase as a result of a price increase due to market perception of value – a belief that a higher price translates to higher value to the buyer.  Even if that is your expectation, it is good practice to know when margins will be impacted just in case the market doesn’t respond as you expect.

Download our free Pricing Increase Matrix and find your own tipping point.

This is the second part in a series of blogs on Doing Business in a Downturn.  If you missed the first one you can find it here.

Discounting can eat directly into your profits.

Too often the first strategy to maintain market share or to generate sales is to discount pricing – particularly in a downturn.  This is a strategy that must be strategic, intentional and the numbers must stack up.

Giving a 20% discount is like working on Friday’s for free!

Consider this…  A retailer who has a gross profit margin of 35% must increase sales by 40% if they discount prices by 10%.

This is massive.  If sales do not increase by 40% or more the business will suffer reduced profits.  From the point of view of the customer a 10% price discount may not be a serious incentive to buy, yet the effect on the retailer’s profitability can be significant.

This, as a strategy is often very much about working harder not smarter… you may generate some cash in the short term, be run off your feet serving more customers, BUT feel the pinch of reduced profit in the longer term.

Most businesses discount because they think that price is the deciding factor in the buying decision.  They hope that a discount will incentivise a customer to buy.

In fact research indicates that when asked the question…  “Why do you choose not to deal with a business or to leave a business and go to a competitor?” price did not rate highly –

• 3% > more convenient to purchase elsewhere;
• 9% > relationship with a person at a competing business;
• 15% > couldn’t get the product they wanted at the price they wanted at the time they wanted it;
• 68% > perceived indifference – the care factor was low; and
• 5% > other reasons.*

Here are 6 Insights to help you negotiate the pricing story

1. Potential customers come to your business because they have shown an interest in your product or service specifically.   Be able to clearly articulate your value proposition and ask for the sale.
2. The reason why people ask the “how much” question may not always be because they are shopping around on price.  It may be that they see this enquiry as an icebreaker, a place to start the conversation… not to start and finish it.
3. By answering their question and giving them the price (and only the price), you are actually showing that you are indifferent to them… indifferent to whether they buy from you.  Remember – 68% of people leave not because of price but because of perceived indifference.
4. Indifference turns up in many forms – like not asking your customers what their needs are, what features are important to them or what they have experienced in the past.  It shows a lack of interest.  As does not actually asking for the order or the sale.
5. If the salesperson gives the customer the price, and then neglects to ask for their details so that they can follow up or assist further, this is also an example of disinterest in whether the customer buys or not.    When you consider that 8 in 10 people purchase after the 5th contact with a company, it is easy to see why follow up is so important.**
6. If you are continually running discount promotions, you are effectively training your customers to wait until you have your next discount promotion.

3 ways to avoid discounting and NOT compete on price

1. Improve your customer service – be innovative and create a WOW factor – ramp up the customers’ shopping experience – their experience is intangible yet valued.
2. Add value – instead of discounting add a bonus product or service – something of low hard cost and high perceived value
3. Educate customers about the value of your product – focus on the benefits – the what’s in it for me (WIIFM) from the customers perspective.  Bring something to the table that they don’t know.

The warning… ongoing discounting as a strategy for increasing sales will not guarantee increased profitability.  Work through the numbers.  Know exactly how much your sales need to increase to maintain profitability.

Download your FREE Discounted Pricing Matrix

*Source:  From U.S. government study “Why Customers Stop Buying.” Comments by Warren Greshes and Bob Mellon

** Source: National Sales Executive Association study

What is profit?  So often when encouraged to aim for even higher profits, business owners (in a state of discomfort) tell me that profit is not the be all and end all – to focus on profit is quite vulgar, commercial and we should be promoting contribution and living into our why, being on purpose – what is more important is that we love what we do, that we want to help others.

BUT… what if you could help more people, what if you could do more of what you love to do and less of what you don’t, what if you could choose to do what you do and not get paid, what if you had more discretionary time – profit enables you to do these things.  It enables you to be more philanthropic, it enables you to employ others to allow you to do more of what you love and help even more people, to work on your WHY.  Profit is an enabler… it enables you to make a difference – it enables you to do stuff.

So what if we aim for a higher enabler?  Is that ok with you?

 

 

Time?  Commission?  Schedule of Costs?  Or Value Pricing?

Which one?  Professional service businesses who have embraced value pricing have seen impressive increases in productivity and profit.  So why is the take up so slow?

Here is some food for thought…

For those who have invested many years perfecting their craft and invested significantly in improving efficiency, in people, IT, systems and learning… time based billing does not always reflect the real value transferred.

Pablo Picasso:

One day a woman spotted Pablo Picasso in the market and pulled out a piece of paper.  “Mr Picasso”, she said excitedly, “I’m a big fan.  Please could you do a little drawing for me?”  Picasso happily complied and quickly etched out a piece of art for her on the paper provided.  He smiled as he handed it back to her and said, “That will be one million dollars.” “But Mr Picasso”, the flustered woman replied, “It only took you 30 seconds to do this little masterpiece.”  “My good woman,” Mr Picasso laughed, “It took me 30 years to do that masterpiece in 30 seconds”.

Read this daily!

Remember the first sale is to YOURSELF – YOU must firstly believe that the value transfer is fair and balanced – that price = value.

A significant shift in thinking is required to accommodate the value pricing model, when historically you have billed based on the time taken to do the job, a schedule of costs, or on a commissioned based calculation.

Only then will you be able to confidentially articulate the value to your clients.

The point of reference is no longer the input based pricing but the clients’ outcome based value.  Price is justified by the value added to the client NOT the number of hours it takes to do the job.

Value pricing is all about:

• You valuing you and the intellectual capabilities of your business;
• Realising that you do not sell time – you sell knowledge;
• Making the invisible, visible – tell your clients what you will do, and what value you will add and tell them again;
• Finding the value in everything you do from your clients’ perspective – it is there it just needs to be unbundled;
• Articulating the value to your clients – they won’t understand if you don’t explain it; and
• Being confident and believing in yourself.

Consider this:– it is not up to you to set the price – it is up to your market.  If there are no objections – your price is too low – continually test the market until you establish the real value.

Share these concepts with your team – they must be on the same value-pricing page as you are.  What I have found is, it is the team who more readily embrace value pricing and they will keep you accountable!

It is not rocket science.  It makes financial sense both to the client and the business.  And as part of the process of pricing up front, value pricing reduces WIP and Debtor days, delivers a more stream lined billing process and so much more.

At Opening Gates we examine the benefits, myths and challenges of value pricing with business owners and their team, and kick start the implementation process in our BUSINESS by DESIGN Program.  How successfully do you and your team implement value pricing?