Are you charging too little for your products or services?
This is a common question and the one that goes with it is “When is it appropriate to raise my prices?”
Pricing is always an issue that comes up when I work with business owners. We should never want to be the lowest-priced product or service (with a few exceptions) because you don’t want people only buying from you because of price. We need to evaluate what a fair price for these services is. Sometimes that starts with answering the question, “What makes you better than your competitors?” And “Will your customers pay more money because you’re better?”
Really, it boils down to the question “Have you built the value of your product/service to justify the price you should be charging for it?” If someone doesn’t know its true value, and there is a cheaper alternative, will they pay what the product/service is worth? Not likely. They will only buy on price. You must help your customers know your Unique Value Proposition (UVP) and why it should matter to them.
Knowing how much you should charge for your product or service begins with asking your customers and prospects what they’re willing to pay. You begin by choosing who your perfect customer would be. Can you picture them in your mind? There are many ways to decide on who they are. (I have a tool that can help with this. See the end of this article for a link.)
Once you have your perfect customer in mind, what is the pain, want or passion (the three things that motivates people to action) that you are going to help them with? Be specific and precise. How will your product/service help them with the problem that they have? If you use features, the prospect won’t understand how that will help or affect them. You must be using benefits to talk to talk to what your solution is for their pain, want or desire. If you have a purpose statement already written, it can help.
Now comes the hard part – finding your perfect customers and asking them about your product or services. You need to be upfront and not take criticism as a personal attack. You want the most honest responses and you must refrain from trying to justify your product, service, the customer’s pain and solutions to that pain.
One thing – Don’t ask family or friends to help you with this. Their answers won’t be as honest as you need. They will soft-peddle the answer or will encourage you even when they really feel it isn’t a great idea. They are more concerned about supporting or encouraging you.
Now ask them questions that will help you find out if the assumptions you are making about your product or service are correct. Maybe you will find that your customer is a bit different than you thought. Maybe they have a different pain, want or passion that wouldn’t have responded to the benefits you offer. If you find the people you survey are the wrong group for your product or service, find out who they think you should talk to. Now pivot – rework your assumptions and ideas and you can begin looking for this new group.
If you do have the right group, ask them if what you have is better than what they are already using. Have them validate by asking them open-ended questions about your UVP and its benefit statements that you have prepared.
Now ask these questions:
- What price would you be willing to pay for this product/service?
- What price do you think would be too low to be trusted and of value?
- What price do you think would be too high and thus unable to compete in the market?
When I ran the newspapers in my community, I found that some advertisers always complained that I should price my ads lower. When I asked them the above questions, I found they gave my ads a lower value because they didn’t understand the real value of the ads. But when I asked them about the return on their investment, they usually admitted that we were producing a good value at the pricing I was offering (usually 4 to 1 or higher). When I asked the last question after this discussion, I always got a price that was 20-30% higher than what we were charging. I found that they didn’t want me to raise the price so that they could get a higher return. Good for them but bad for me.
Some years ago, the city I live in got to the point that they needed to raise the price of water to the residents. They hadn’t raised the price in over 20 years. They were the lowest price of all municipalities and were really losing lots of money each month. Previous city councils before them just didn’t want the political fallout of raising the rates.
The city announced that they were going to nearly double the rates. The next city council meeting was filled to overflowing and the residents were angry. They postponed the meeting to the next week and moved it to a much larger location so that everyone who wanted to attend could be accommodated. Over 1,000 angry residents came out to protest the new rate. The city council stayed late to hear from every one of the people who wanted to speak (at 2 minutes each).
One old-time resident stood towards the end of the meeting and made a point: The city used to raise the rate by about 5% every year to accommodate the increasing costs and maintenance of the system. But a city council came along that felt they should change to a program where they would only raise the rates when they could justify doing so. It was a way of saying “No more taxes.” While it sounded good, it led to a situation where city councils were fearful to ask for a rate increase even when needed. This led to a situation where instead of raising the rates when needed, they postponed the decision until a brave council was willing to raise them by about 100%. Previous councils had just kicked it down the road for 20 years.
The old-timer stated that a gallon of gas had gone from 35¢ to $1.98 in this same 20 years. A brand-new automobile that he bought in 1980 for $4,500, was now selling for $11,000. Property values had gone up and so had house values. Yet the residents didn’t want to pay $33 per month for their water (it was originally $17). His point was that the city should have continued to raise the rates slowly each year and most residents would have found the yearly35¢-50¢ per month raise would have been really nothing to them.
He finished by showing that $33 per month, the residents would still be paying below the average of the other cities in the valley. Just not the lowest as they were before.
Business owners with customers that use their product or service often need to be aware of this. When I ran the newspapers, I found that most of my customers expected the price of ads to raise slowly with a small increase each February. After the economy tanked in 2008, I made the mistake of not raising the rates for the next four years. Our costs went up a bit and then we found we were in the same situation as the city I just mentioned. I raised the ad costs by about 15%. It wasn’t a big raise but I lost 20% of our advertisers because I raised ad rates too much at once.
Don’t be afraid to raise the price of your valuable product or service when it is justified. Just know that if you wait too long or you raise it too much all at once, it can hurt you.
I always suggest talking to your stalwart customers beforehand when you’re contemplating a price increase and ask them for an honest response. Help them understand why you are raising the price and then use what you learn from them to talk to your other customers about the pricing change.
BTW – the city chose to raise the water rate by $10/month for the first year and then by the remaining amount18 months later. They now raise the water rate yearly by less than 5% per year and few residents complain.
Pricing is a tough subject but it can be a good conversation to have. Want more information on this? Let’s talk.
Boyd Petersen
Certified Marketing Coach
Link to help you determine who your perfect customer is: http://utahforge.com/UF_Persona_Definition_Form.pdf
Download my new whitepaper called “What school didn’t tell you – about starting a business!” You’ll be surprised and see why 1 in 3 new businesses will fail in the first year because they didn’t know these things. Click the image to download.
