The Simple Secret To Raising Prices 5% & Increasing Profit 50%

In the world of business, everyone loves bargains. But In the world of business today, price becomes the only thing that’s important if everything else is the same -- and service may be one of the only distinctions you have to offer. Many companies compete on price because they feel they don’t have good differentiation.  Competitor price monitoring should give you a pretty good idea of where you stand in relation to the retail giants and those who charge less than you. If Fortune 500 companies do this, they may lose some margin and billions of dollars, but they carry on. If small businesses do this, they go out of business. In fact, the smaller retailer may fail for both financial or psychological reasons.

For example, say that your business does 10% margins. If you feel you have to drop prices 5% to match a competitor, you now have to make double the sales just to get the same profit. Does that make sense? Even if you do this, you will now have double the orders to handle. That also means double the chances of something going wrong, more people, more inventory, more support staff, more costs, and more stress. So even if you stay afloat, you may decide at some point that it’s not worth running on a treadmill that keeps going faster and faster and doesn’t go anywhere.

But if you raise prices 5%, you can increase profit 50%. For a lot less work you can make the same profit, with fewer hours, fewer employees, and fewer support calls. Fewer customers equal less stress. Does that make sense to anyone? An alternative is to be different. What do I mean by this? Don’t let price be the only factor. For many small businesses that sell exactly the same products as larger businesses, the difference is service or some other distinctive quality. A lot of your potential addressable market won’t care about your service. That's ok, because those are NOT the customers you want. You must go after the ones who value your differentiation and are loyal in the long run. Most big companies appeal to broad markets. That means there are niches where smaller companies can add value. And when a customer in your niche challenges your price compared to the big players, it’s a great opportunity to remind them of the value you deliver.

To give you some more good examples of how the competitive landscape has changed, see Gilon's blog post from a few days ago about how the Retail Tech Titans are changing their original raison d'etre and becoming more competitive. Remember, ten years ago Google was a “niche” player in established markets; advanced health nuts drank pomegranate juice or organic milk; Blockbuster was the 800-pound gorilla of the movie rental market; and the dodo once roamed the earth. Each of the Tech Titans began by serving special niches, as Gilon wrote: Remember that Apple built and sold personal computers; Google was a search site; Amazon was an eCommerce retailer; eBay did online auctions; and Facebook was a social network?

Takeaways:

Service still counts, and it's still one of the ways to distinguish yourself from the competition.

1. Price isn't the only factor.

2. Don't compete for those customers who don't care about service.

3. Someone can always offer “something” cheaper. 

4.  Always use competitor price monitoring to know where your pricing stands in relation to your competitors at any given time.    

It’s hard to be passionate about working for or buying from a company whose only goal is to provide the cheapest thing.  

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Reuben Swartz, Guest Contributor

About Author

Reuben is a world-renowned expert on pricing, and combining pricing strategy, business processes, and technology to dramatically improve profits and boasts "the longest running blog on pricing and profitability". He has helped companies in North America, Europe and Asia and he teaches part of the Professional Pricing Society's Certified Pricing Professional program. You can follow him on Twitter or on Dollars and Sense: The Pricing Blog. Reuben's company, Mimiran, provides software to help business owners and sales teams create, share and close online proposals, while improving revenue and profit and helping companies focus on their customers.
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