Recently, a colleague and I were discussing various kinds of pricing structures, and this spurred a conversation about the kinds of situations in which a company may need to raise or adjust prices. In fact, a price change flows directly to the bottom line, and can have an enormous impact on a business’ profitability.
So, with over 25 years of facilitating pricing strategy with clients, I thought I would share some of the powerful indicators that, to me, signal that it’s time to consider adjusting your pricing.
1. You’re crazy busy and still broke.
If you’re having a record year, but there’s never anything left at the end of the month, pricing could be the problem. I call it, “Selling yourself into a corner.” All your time is gone, but you have no money left to manoeuvre, do maintenance, invest in promotions, or buy necessary equipment. Mind you, you must still consider whether you have employees not pulling their weight, unnecessarily high overhead, or are doing something new and unfamiliar for which you are just not yet efficient. If none of these issues seems to be the problem, then it is very likely time to look at raising your prices so that you can give yourself breathing room to grow.
2. You’re attracting undesirable customers.
Are customers coming in your door because your competitors are charging more? Are those customers perhaps not willing to pay much, or only ordering the very lowest level of service or product from you? If this isn’t desirable business, don’t put a sign on your door that says, “Cheapskates please go elsewhere.” It just likely means that it’s time to raise your prices.
3. Every job is behind.
Is your schedule crammed up beyond reasonable manageability? Maybe you’re saying yes to just too many customers to whom a “no” would have worked better. Sometimes reducing opportunities by raising your price, and being more selective, can get you into a better profit position.
4. You’ve just invested in something noteworthy.
Have you redeveloped your brand or website recently? Moved into a nice new office? Hired an incredible new employee? Or perhaps renovated? Any of these might have emptied your bank account, but the real reason these things can be timed with price adjustments is that customers can see you’re investing in improving your business,i.e. they may be paying a little more, but you’re giving them more in return – a better experience. If you can take the opportunity to improve profits by raising prices, why not do it?
5. You’re not winning the cream of the crop.
Too-low pricing sends red flags to sophisticated buyers that you’re not “in their league.” Instead of thinking, “What’s great about this company” their minds ask, “Where are they cutting corners?” This is further exacerbated by rankled competitors who are not happy about being undercut saying things like, “They’re too small to handle your business” or “They probably don’t have all their industry certifications, proper equipment, insurance, etc.” If you can’t make an argument about your buying power or internal efficiencies to justify those low prices, seriously consider raising them.
6. Your pricing deters further purchases.
If you feel like you need to do a better job for your customers, but customers already express fear of your pricing, it may not be that the price itself is too high. It could be the structure of that price. For example, a lawyer who charges $600/hour probably has clients who are doing their own little bits of legal work on their own, just to avoid the high hourly rates. But if that lawyer had a set-priced rate sheet for various kinds of jobs (e.g. employment contract $300 – since he just pulls it off the shelf), and the customers knew what they were going to pay before they started, this shifts the perception from being expensive to being reasonable. So, if your rates deter future business, it may also be time to look at your pricing structure. And sometimes you can earn more this way – for example, that $300 employment contract may have taken that lawyer only 10 minutes to handle, which works out $1800 per hour.
7. You haven’t looked at it in over a year.
Don’t let inflation kill you by being passive about your pricing. The thing about price changes is that if you wait too long, the price increase needed may be so great that it becomes insurmountable, which could cause you to lose clients before you can regain profitability. For this reason, I recommend you review your prices every year. If you need to make changes, make them gently and gradually. Most customers can live with a 5 – 10% increase each year, but few can handle a 30% hike at once, which pretty close to what you’ll need if you wait five years!
8. You aren’t paying yourself.
Is your business in a non-sellable position because you haven’t paid yourself adequately in years? This is likely because your pricing is too low to allow for it. Remember, there is no point in owning a business that doesn’t make any return for your time. Let alone not being able to replace yourself. If you can’t (and I mean can’t not won’t, say for tax reasons) pay yourself, and you’ve been in business longer than a year, it’s time to raise prices.
9. Your business costs change.
If key suppliers raise or lower their prices, this could be a reason to adjust yours – just keep in mind that it isn’t the only solution. It might also signal that it’s time to shop elsewhere for the same services. Today’s marketplace is global – you don’t have to buy from the same suppliers. But if you choose to keep the ones you have, and they have legitimate reasons for their changes, you too can pass along those same reasons and make the necessary adjustments.
10. You’re always following the pack.
Are you simply following the price swings of your competitors without knowing why? This is no way to be a leader in your industry. Pricing is among the most powerful tool you have to steer yourself toward the kind of business you want and avoid the business you don’t. The things you include in your price, and the way you bundle your services and products into solutions, is what makes people think, “Oh, that sounds like a good deal” or “Geez that sounds like a lot of value for the money.” How you price can make your brand completely unique.
11. You’ve overdelivered to your customers.
Have you heard comments (e.g. comment cards, Google reviews) from your customers, competitors, and prospects that suggest your pricing might be less than expected? Then it’s time to listen to the feedback, and/or get some more. If you conduct research and ask people what they would reasonably like to pay, you can get yourself in the right price zone. You can also ask them whether the price was higher or lower than they expected it to be, for example, did they buy from your business because it was less expensive, only to find out that it was actually the best solution on the market? They’d likely be happy, but you might be losing money.
12. You’ve got new information.
Have you been price-matching a competitor all along, and then recently got it on good authority that their product offering or quality is nowhere close to yours? Or, did you actually buy your competitors’ products to see for yourself? (By the way, good for you – that’s a good marketing move!) and now have first-hand experience that your services or product are not at all the same? Remember that people expect to pay more for something better. If you are in a different league, price yourself higher to make it believable to your customer. Or pare back your quality to your competitors’ level, and keep your enhancements as separate, add-on options. Remember, if you price at the same level as your competitors, you are silently telling the customer that you are offering the same thing. It also lends credibility to your competitors’ pricing, like saying “I agree with them.” Customers like to shop apples to apples, so only price as apples if it’s apples you’re selling. Pricing differently tells them you’re distinctly different.
In summary, pricing is a crucial element of marketing strategy. Never underestimate its potential to shape your customers’ decision-making, or drive your business in the right direction. Will people pay good money for something different or something new? You won’t know unless you ask, so never assume a “No” when it could be a resounding “Yes”!
Next Up: Raising prices requires a carefully considered rollout – check out our “How to Raise Prices” blog.
