Price hiking is the most under-used strategy in business. Shaz Nawaz, founder of AA Accountants, describes when it makes sense to inflate prices instead of slashing them.
How much more can I charge? This is a question I am often asked by most of my clients. The challenge in answering this question is that even I don’t know how much more they can charge. The reason for this is that you get to your magic price (optimal price) by testing and measuring.
A naive approach would be to charge in comparison to your competitors – this usually results in businesses charging less than others! The problem with this is that your competitors may not be offering exactly the same service or product. Which means you cannot price based on what they’re charging. Unless, of course, you’re very clear on the quality and value differentiation.
You’ll understand this better once you’ve read all the way through this article. What I do know is that many businesses charge far less than they should. They do this for a variety of reasons – too many to discuss here.
What you should be interested in is ‘how do I increase my prices without detriment to my profits’ – now that’s a much smarter question. The truth of the matter is that different people will pay different prices for different things. It’s based on preference and more so on perception.
If you perceive something to be of better quality or if it solves your exact pain/problem then you’ll be willing to pay more for the solution. The difficulty is that most businesses don’t always understand the value they’re delivering because they aren’t their own customer.
I was charging the wrong prices in my business for over 8 years. I basically established how much the client was paying their previous adviser and I did one of two things:
- Discounted the price – if they came across as price sensitive or they weren’t referred to me by an existing contact
- Charged a bit more – if they were referred to me. This was because the referrer had done some of the selling for me by singing my praises
Like most businesses, I was totally focussed on winning more clients. That’s how you grow a business, don’t you? Or at least that’s what I thought! I couldn’t have been further from the truth. Yes, more customers do help grow your business. But better pricing helps grow your profits.
“My profits went in one direction only – exponentially north”
In order to prove this I embarked on a journey of discovery. This journey led me to try and test different ideas. And I soon established that the quickest and simplest way to really grow my profits was to increase my price. You may be thinking this would lead to losing most of my clients. And I thought the same thing. But I was wrong!
To my amazement everyone agreed to the price increase. Now this wasn’t because I caught them on a good day or they were feeling overly generous. It was, in fact, the method I adopted for increasing the price. See, as soon as I established that different people pay different prices, I used this to my advantage.
I discovered that a good, better and best service offering would help me secure higher prices. If we pay different prices for different things then surely some people will naturally want the best option while others would want an option better than the standard offering.
This judgment came to me when I stayed at the prestigious Burj Al Arab in Dubai. The penny dropped as soon as I walked in. The hotel was fully booked even at their premium prices. This helped me realise there’s pretty much a buyer for anything and everything. All I needed to do was position myself as the premium service provider.
There were two things I did which helped me increase my price from a minimum of 28% all the way through to 400%. The first was to position myself as the go-to expert. I did this by doing everything an expert would do in my industry thus leveraging my profile and credibility.
Three-tier pricing model
The second and the one literally everyone (with a very few exceptions) can do was to offer different options. I developed a 3 tier pricing option. It was the good, better and best model. How this helped me was that I seldom left money on the table.
The client always chose the service that suited them the most. What it also meant was that due to giving more options, I won more business. With one price, the client can either buy or go elsewhere. With 2 or more options they are more likely to choose one of the offers because of the choice they have.
My profits went in one direction only – exponentially north. The reason for this was that all of my fixed costs were covered. I was paying rent, rates, utilities etc anyway. If I had more, or even less clients, these expenses didn’t change. So, as my prices went up, most of the increase went straight to the bottom-line. If only I’d have known this when I started my business!
You’ll see from your own experiences that a tiered option is offered in one of the toughest and price competitive industries in the marketplace – the retail & electronics industry. Be it Apple and their products – you get to choose the size of the screen and the capacity of the memory and you pay more. The same applies to many other suppliers in that space.
You buy gym membership and they give you two or more options. You buy a ticket on a plane and they do the same. You buy web-hosting services and it’s the same. I mean when you start looking around, you see this being done more and more.
Your next step
What you need to do is think about how you can add some additional value to your customers. All this can be (if you want) is things which are low-cost to you but which have a high perceived value to your customers. You can then have a 2 or 3 tier pricing model.
What you’ll find is that between 10%-20% of your customers will buy the top option. This is based on their own self-worth. They’re doing this because of who they are not and necessarily based on what they’re buying.
What you’ll also find is that most people will opt for the middle option. Why? Simply, because it’s perceived to be the best value for money, and the most sensible option. Staying in the middle seems to be a rational choice for various reasons.
Most people don’t want to miss out by buying the cheapest. They also don’t want to look cheap by buying the lowest-priced offering. There are many other reasons which I’ll explore and share with you in a future piece.