We are taking a break this week from our recent focus on BNI to look at a more general business topic.
Pricing decisions are critical for any business. There is an old saying, “you can’t make good wine from bad grapes”. If you price too low too often it’s impossible to make enough money to meet your personal and business objectives. Price too high, even in a captive or monopoly market and you risk having no business at all. Currently we are experiencing relatively high inflation so members should be considering carefully how they price.
We aren’t going to discuss the demand vs supply or pricing methods in this education, that’s way too deep for 3 minutes. It just general tips about some dos and don’ts of pricing.
Prices Are Up, Is Your Profit Down?
Inflation is a hot topic right now. Interest Rates, Furl Rates, Employee costs, Freight just to name a few.
Food price inflation remains at a 13 year high at 8.3%. Most businesses run on average 10% net profit before tax so if inflation is 5-10% and your prices don’t increase, or your costs don’t decrease then your net profit can quickly disappear.
If you were to think about increasing your prices (or “right” pricing your pricing) what should you think about?
Little and Often
If you have clients who buy from you regularly, rather than occasionally, right now they are expecting price increases. There will be less resistance to price increases than usual. However, a small, almost inconsequential increase will probably be more easily accepted than a big increase causing “sticker shock” and motivating them to price shop elsewhere.
Another small increase a few months later will also likely pass by without your clients even noticing. There is a strong argument, even in less inflationary times, a small annual price increase is a good idea rather than a large increase every 4-5 years.
This doesn’t mean you should be upfront with regular clients about price increases. The content and delivery of communication about price increases is critical and talking to an email marketing expert is highly recommended.
Don’t Be Scared To Increase Your Prices
Why?
1.Clients are expecting price increases right now. Some will contact say you have been too cheap for too long (but they won’t offer to give you backpay!)
2.Clients that stop using you because of a price increase most likely won’t be your best clients anyway.
3.You should never want to be the cheapest and if you don’t raise your prices you might end up being the cheapest.
“I Price Every Job”
If you price every job, then it’s critical you are across your current costs AND allow for price increases you might be about to receive yourself. You will be carrying out the job at a future time with future costs.
Occasionally price work at a point where you think you might, just, lose it on price. Especially if you aren’t desperate for work. If you get the job, it may mean you are under-pricing generally.
Whenever you price a job where you know the client will be getting competing quotes, always say to the client “if I’m more expensive there will be a reason” and offer, as a favour, to review the competing anonymous quote to make sure its apples for apples.
Summary
• We have been used to annual inflation rate of less than 4% for the last ten years.
• We may have been able to become more efficient to hold our prices and improve profitability.
• We aren’t used to a high inflation economy, so we need to learn how to adapt in this environment.
• Review your pricing with your business advisers to make sure you know how much you need to charge to stay profitable.
