Archive for September, 2013
When looking to increase prices, it is vital to understand that different customers are willing to pay different prices. Like first class, business and economy on a plane.
If you have a single price it’s either nearly always too high or too low and whatever it is you will lose. Think about it, if the price is too high they will not buy from you and you lose. If the price is too low they will buy but they will pay you less than they are willing too and you lose again!
The key is to find creative ways to charge different customers, different prices based on what they are willing to pay. This is called Price Discrimination.
Let’s have a look at some numbers to see the implications of that idea.
Let’s say you have a hundred customers and 90 are willing to pay just £5 for whatever you sell but 10 customers who would be willing to pay £10.
If you charge everyone £5 (regardless of what they are willing to pay) and let’s say the cost of supply is £4, you will make is £100. But, look at the alternative – if you charge 10 customers £10 your profit goes up to £150. That’s a staggering 50% more – what would 50% more profit mean to you?
The idea is to charge different customers different prices, legitimately without ripping them off. That’s our challenge and the great news is it’s happening all around us already.
Here are six ways to do this:
The first example is trade-ins.
Have you ever wondered why a white goods retailer is willing to give you £50 for an old washing machine against a gleaming new one? They don’t want your old rusty washing machine. They probably just throw it away which would cost them money. So, why on earth they would pay you £50?
Well, the answer is this is one way of charging different customers different prices. Think about it, if you already have a washing machine your need for a new one is not as great as somebody who does not have a washing machine.
For example, if you are a newly married couple you need a washing machine and you are probably willing to pay more for it. But, if you are a happily married couple, whose washing machine is still working fine, you do not desperately need a new one – so perhaps you are not willing to pay so much.
The second idea is making a quality distinction.
Can you have a premium and an economy version of what you sell? Pubs do it; the same pint of beer is more in the lounge bar than it does in the saloon. The same words in a book cost more in hard book than in paperback. It’s not cost that driving the products prices. It’s the fact that different customers are willing to pay different price.
The third strategy is charging different prices linked to timing.
Many businesses offer or allow customers to pay different prices according to a time dimension. For example, a peak time train ticket cost a lot more than a ticket on after 9:30. Peak rate phone calls cost a lot more than in the evening. Peak time drinks in a bar cost a lot more than in happy hour. All these are examples of how businesses have introduced a time element to charge different customers at different times different prices.
The fourth strategy is bundling.
Ever wondered why when you go a restaurant you can chose of the expensive A la Carte menu or a set menu? And, on the set menu there are usually some of the nicest and most expensive things on the A la Carte menu.
But, they are bundled together at a ridiculously good value. Sometimes you pay the same for a three courses about the same as the one main course off the A la Carte.
How does that make sense from the restaurants point of view? Well, that’s perfect because they know that some of the people that are coming will be budget conscious. There will also be others who don’t give a monkey’s about the prices because they try to impress the person they are with.
So, they will order the A la Carte and expensive wine. Some people are willing to pay more than the others. If you had a single price you wouldn’t be able to accommodate them and that single price would either be too high or too low.
Also, restaurants will not let that happen. They have a set meal and a wide range menu. So different customers pay different prices and the restaurants make a lot more money in the process.
The fifth way to change different prices is the channel through which you sell things.
Think about it the same roll film cost a lot more in Disneyland than it does in boots chemist. It’s the same product but the channel through which you buy allows different prices.
Products and services tend to be available cheaper via the internet than in person. Those people who are willing to pay more for personal service can, others who want to pay less also can. Dell online is a good example.
The sixth strategy is concessions.
Why do businesses like cinemas, hairdressers and museums offer old age pensioners, children and students a price lower than they do the vast majority of the rest of us?
Because they recognize old age pensioners, children and students can’t afford as much of that single price.
A lot of people wouldn’t come in and that will be crazy because it’s all about maximising revenue from the capacity. It costs the cinema the same if they are full or have either seats, any extra revenue from concessions is all pure profit.
Concessions allow some people to pay less and we don’t object to that, it’s just the way it is.
The challenge for you is to find ways to take these principles and apply it to your business so that your customers can pay different prices.
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You may be able to increase your price by one or two percent without losing any customers. But, if you want to increase your price 10% or 20% then it is probably worth taking actions to reduce the chances of losing customers.
You can do this by re-launching your service, product or brand in a way that takes the focus away from just the price.
If you are going to be more expensive than the competition, you need to give people a reason/s to pay the extra. This can usually be done as a package with new guarantees, safeguards, higher service standards and more benefits because when you do that you can justify a new higher price.
Let’s take the example of a roofing company.
Most construction businesses usually turn up in filthy vans and roofers are normally covered in black tar. They turn up at your house unannounced, saying they have some spare materials from another job , asking to take a look at your roof.
Let’s imagine that a typical roofing company struggles to charge more than £5,000 for a certain type of job.
Now, let’s think about a business that positions itself as a “professional” roofing constructor with guarantees. When the owner turns up he says “I know that some people in my industry have a bit of a bad reputation for going on to the roof and kicking things off and telling you that they need to be replaced. Well, we don’t operate like that, but I don’t want you to take my word. So, on our Website we have video written testimonials from people in the local area about the service we provide”.
Then he bring out a leather folder and says “here we have some of the most recent client surveys because we carry this out at the end of every job”. You can see surveys with people saying how wonderful they are.
He could then goes on and says “I guess you would like to be comfortable that we will provide exactly the same kind of service to you and that why we have a range of guarantees built in.
First, you have a guarantee that we call the turn up and clean up guarantee. If we don’t turn up when we said we would turn up and if we don’t clean up at the end of each day to your satisfaction we will deduct £50 pounds off the bill. We will do that for every single day that if we don’t turn up on time or clean up at the end of the day.
Our second guarantee is you don’t pay for the job until it is completed the way you liked it. In other words when we think we are finished we give you an opportunity to check and if you’re not completely delighted with the work we have done for you simply don’t pay us, until you are delighted.
Now, we will ask you to tell us why you are not delighted so we can put that right, but you don’t pay until you are delighted. This means you will not feel ripped off because you always get exactly what you want. You will not pay until you get exactly what you wanted.
Our third guarantee is this when we leave we guarantee that roof wont leak and if does leak within three years we will come back and fix it for free. And, we won’t hide in the meantime; we will contact you each year to ask how your roof is and after 18 months we will do a site visit to check that it is showing signs of leaking. That’s how strongly we believe in what we do”.
Those kinds of guarantees will already make you think well this roofing contractor is really different, but that’s not it.
They also set a new service standards because he goes on to explain; “as you notice we all wear this uniform” and he points to his clean overalls blue with a very stylish logo with the name of the roofing contractor firm on the chest. He tells you that “every single one of our team is wearing this because they are employees, not just some cheap contractors that we sub contracted the work out too to sell you short.
He says “we all want to feel good about the people who are working in your premises. You want to trust them. This is part of our way of showing you.” He says “we asked customers about their concerns about roofing companies and they said that they are a bit nervous about working with a contractor because you have to take their word because not many people want to go up a ladder on the rook and have a look at the damage.
So, we take a video recorder up the ladder and film the damage and show you exactly so you know we are telling you that truth. And, then when we have done the work will take the camera back up there and film it again, so you can see that we have done what you have paid for. You know you’re getting exactly what you want exactly what you are paying for and that’s not what we all did because our job finishes at the end fixing the roof”.
How do you think that compares to the other roofing contractors?
Could they charge £5,500 instead of the normal £5,000? What about £6,500 for the additional service standards and guarantees?
This is just about:
- Cleaning up
- A check up
- Wearing a clean uniform
- A video
- Developing a script
If you think about it, putting right work that is faulty is what the business needs to do anyway!
What about referrals. Do you think the customers are more or less likely to recommend this type of business?
The vast majority of people will pay a little extra if they get a lot more. That’s the point when you create guarantees, safeguards, new service standards and benefits.
When you re-launch what you currently do most people, not everybody, will say OK. They’ll pay you 10%, 20% or even 30% more.
Remember, you maybe able to afford to lose 20%, 30% or more clients and still make more money.
To answer the question, let’s look at an example of a business is making sales of £1,000,000 with net profit of £200,000.
Let’s say we cut our prices by 10%.
If we cut prices by 10%, and nothing else changes, sales will go down by £100,000. This will come straight to the bottom line and reduce profit in half to £100,000.
But, you may argue that the business will get more customers because it is cheaper.
The question is how many more you need to get to make more money of the cut of price you needed before?
Well let’s do the numbers based on the business having 2,000 customers. The profit per customer would be is £50, so to make £200,000 they will need 4,000 customers which us 100% more!
Would cutting your prices by 10% double your customer base?
Now lets’ do the reverse.
Let’s say that instead of cutting our prices we look at an increase in our prices by 10%. You’d probably say that you will lose too many customers to make it pay.
Let’s see how many customers you can actually afford to lose?
Well, with a 10% price increase the profit per customer is £150 so we only need 1,333 to make £200,000. So, as long we don’t lose more than a third of our customers where making more money than before.
Let’s say we lose 20% of our customers leave, this would leave us with have 1,600 people paying £550 with a cost of £400 giving us a total profit £240,000. We are £40,000 better off.
Not only do we make more money but because we have fewer customers we sell less which means we need less money to fund our business.
We need to borrow less from the bank because we have got rid of some high hassle, low margin customers. Life is easier because we got less work to do, less stress and less risk.
Now, these numbers won’t be exactly accurate for your business. But, you can do this type of financial modeling or sit down with you and work the numbers for your business.
Now, in the next few posts I will share some ideas on how to increase your prices and cut the losses to a minimum and even increase customer numbers!