Johnathon, one of our business coaching clients, ran a successful professional services firm with just under $4 million a year in revenue. In his niche the firm had a strong reputation.
When I questioned him about his pricing strategy he shared that he billed hourly for his professional staff. A deeper dive found that his firm adjusted bills if they number “looked” too high and that his average discount ended up around 27 percent.
When I uncovered this I challenged him on this practice. It made sense that there was a psychological factor that a discount made the bigger professional bill easier for his clients to emotionally accept. But, I asked him couldn’t we shrink that discount to say, 15 percent, and still get that same effect? And couldn’t we explore raising your professional team’s hourly billing rate at the same time?
With a little thought and research into what other firms were billing, he agreed to try out a wave of price increases and reduced discounts. He had zero complaints, and increased his collected cash by $300,000 a year. This was additional pure profit for his firm since he had the same overhead, the same marketing expenses, and the same “cost of goods sold” in terms of his professional staff’s costs.
Your turn now – when was the last time your put your pricing strategy on trial?
Most businesses set their prices when their business was first launched, and since they were so hungry for business, they set pricing levels low.
Over time, the business likely only made nominal increases to pricing every few years, but rarely did the owner ever sit down and fundamentally rethink his or her pricing model.
If it’s been over a year, time to look at it again.
How are your prices relative to your costs? Have your costs increased since you originally set your pricing? Have you adjusted your pricing to reflect that? Has the perception of your costs increased? Have you taken advantage of this to increase your pricing?
How about your competitors? When was the last time you took a comprehensive look at their real pricing? When Jonathon did this he discovered he could increase many of his professional staff’s hourly billing rate by 30 percent or more.
Do you have old customers that you haven’t raised their prices in, well, ever? By all means, honor your relationship with your customer. But also be fair and smart in looking out for your company’s interests too.
While some business owners fear increasing prices for loyal long-term customers, the truth is that customers fear “switching costs”–the cost to leave you, train a new vendor, and go through the whole learning curve all over again with someone new. Often the switching cost is higher than your increase in prices, so they won’t leave you just for making changes. At the very least you should explore this in depth.
And finally, do you have limited production capacity and a large and hungry demand that exceeds your capacity to produce? If so, simple economics say that limited supply with increase demand means prices should increase. So if you can’t easily scale your production capacity (which I’m hoping you can) then use pricing to address how you best serve customers in the face of a limited supply.
So what are you waiting for, take a closer, strategic look at your pricing today.
If you want to learn more ways to effectively grow your business and get your life back, I encourage you to go to our website and check out the free lessons. http://bizandlifesuccess.com.au