If you own a small business and are trying to compete on price alone, you’re going about it the wrong way. Competing solely on price severely undercuts the profits you could be making. This strategy that often backfires because your first concern is the price you charge to appeal to the most price-conscious customer when it should be what value do you provide to value-conscious customers.
With an added value mindset instead of a price mindset, you can continually offer a service or product that people will be willing to pay more for; this will, in turn, add to your return customer rate and, at the same time, your bottom line. The best way to think about the value you add to your products is to ask yourself, “what problem do we solve for our customers?” Add to this the question of “what value do we give over our competitors?” and you will be well on your way to a winning strategy that will allow you to stay competitive and raise prices without losing your core customer base. The biggest little word to remember when communicating your price increase: because. Let your customers in on why you are raising prices, and they will be more inclined to continue to do business. Pair this with value, and you’ve got a winning combination.
If you make your business unique, you can raise prices without suffering any adverse effects. The easiest way to do this is to implement an across the board increase of 5-7%. First, you need to research your competition and understand how to sell your value, not just your product or service. Ask yourself some questions: How does your competitor advertise? How is their store laid out? What special deals do they offer? How does their staff treat customers and leads?
Now, first off, we’re not talking about a significant price hike. We’re talking a boost of a few dollars that will add to your bottom line without freaking out your customers. Say you have a service that you typically sell for $90 and you boost it up to $96. The majority of your clients will not bat an eye if they perceive your company as adding value to their lives and buying experience. And the added profits go into your bottom line. Yes, you may lose a few price shoppers who had no loyalty to your company anyway. But look at what they bring to you in the form of a hassle, poor payment habits, customer service headaches, and lost time dealing with cost cutters who don’t understand your value. By raising your prices, you automatically repeal these costly problem customers, leaving you free to focus on the clients who concentrated on the best value instead of the just best price.
Remember, to retain these value-focused customers; you must give them added value for their money. Ask yourself a few questions like, how does product or service compare to our competitors? How does our price compare to our competitors? How do our competitors add value, compared to us? Then ask yourself how easily your customers can price shop or compare values? What are your competitors’ biggest failings or weaknesses, and how can you exploit that? What would your conversion rate be if you raised your prices by just 3%? Now, what would your profit be if you raised your prices by 3%?
These last two questions are important, so let’s look at some numbers. Say you have a product or service that you sell for $100, with a customer base of 1,000 and a net profit margin of 20%. That would be $20,000 of profit across the board for that product. If you increased your price just 5%, that’s $5, you add $5,000 in net profit, bringing your per unit net profit up to 25%, and lowering the number of customers needed to reach that original profit of $20,000 down to just 800.
Now imagine that you’ve retained nearly all of your clients, except for perhaps the 200 price shoppers who had no loyalty to your company and no concept or appreciation of the value you add to your product or service. You have the same profit that you had before, with fewer headaches, and you are better positioned to launch yourself against your competition based not on price, but on value. Think of the added customers you will inevitably bring in based on your value, at this new higher price point, and the impact that would have on your bottom line.
Now you’re ready to dominate in your sector, by adding value and eliminating risk to your customers associated with the purchase. When you communicate with your clients about your market dominating position, in a way that connects with them both emotionally and logically, the value you add goes up exponentially in their minds; this is what makes you stand out from your competitors and reduces your risk when raising prices. When you additionally work to remove the risk from your customers, you entice them to at least try your product or service, which is where you can prove to them the added value you bring, and convert them to loyal customers.