Dear Dan: The last time I tried to raise
prices it was a disaster. Customers revolted. But I’ve cut costs as far
as I can, and profits are too thin. How can I raise prices and not lose
business? —Once Burned, Price Shy
Dear Price Shy: Millions of small business owners
across America seem convinced that raising prices in a bad economy is
financial suicide. Held hostage by industry pricing and recession
fears, many business owners believe that working harder and earning
less is the only way to survive.
But that’s wrong, says pricing specialist Dale Furtwengler, a CPA
and president of Furtwengler & Associates, a pricing consulting
firm. Cutting costs is like dieting. It rarely produces lasting
results. Furtwengler contends that the economy isn’t the issue. Rather
it’s the inability of most small business owners to understand the
value in what they sell, to make changes if necessary and communicate
that value to customers.
In his new book Pricing for Profit (AMACOM), Furtwengler lists four “false” reasons why business owners say they can’t raise prices. He claims all are invalid:
- We don’t have the name awareness of the big boys.
- Our customers only care about price.
- Our competitors won’t raise prices, so we can’t.
- We’ll lose sales and market share.
The real reason that small business owners stand pat on
prices is that they don’t know how to monetize the intrinsic value of
what they sell. If your profits are being hurt by low prices, here are
some things you should know and do:
Survey your customers. Distinguish between those
that are “price” buyers (only interested in lowest price), and those
that are “value” buyers (willing to pay more for value such as
convenience or service). Recognize that not all customers are equally
valuable to your business. Then identify and target your ideal
customer. These will be your most receptive buyers, and the ones to
target with your value proposition.
Listen to customer requests: Are the things they
are asking for minor conveniences they’d enjoy? Or are they actually
improvements you can make that they’d pay extra for? “The key is to
ask for compensation for each of the requests that customers make,”
says Furtwengler.
Calculate value of your products and services: Customers value speed, friendliness, integrity, dependability,
convenience, image, service, innovation and knowledgeable salespeople.
Boil this down to three — image, innovation and time savings – and
attach a hard number to each of these. According to Furtwengler, the
average “image” buyer will pay 5-10 times the lowest price alternative,
while “innovation” early-adopters will at least pay 2.5 times what
other buyers will pay. And experience shows that retail customers will
pay 2-3 times as much for something that saves them recreation time as
they will for the opportunity to make more money. Business buyers want
you to help them increase revenues and productivity, and cut costs.
Avoid price language pitfalls: Many small
businesses hurt themselves by using words that diminish value in their
ads and other marketing messages. For example, phrases such as “lowest
price around,” “guaranteed low prices” or “good value for the dollar”
give buyers the impression they’re giving something up, says
Furtwengler. Why? Simply because the vast majority of buyers expect to
pay more when the value is higher. Use language in your marketing
messages that is customer-focused, results oriented, exciting and
appropriate for the value that your business provides.
Price for bad times without compromising value: You can do that by asking your customers what concessions they are willing to make in return for a lower price.
Bundle up: Bundling products and services is a
time-tested approach that really works for companies of all sizes. It
sweetens the deal for customers while increasing your average sale and
profits. Bundling also increases employee productivity and lowers your
risks. According to Furtwengler, the key questions to ask in
establishing an effective bundle are these:
- What are some of the challenges these buyers face?
- Can bundling help them overcome these challenges?
- What could I bundle together to make life easier for my customers?
- What benefits would they gain from these bundles?
- What benefits would I gain from these bundles?
- What scripts would I use to communicate these benefits to my customers?
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