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Monday, November 03, 2008

Pricing theory: The grounds for raising your prices in 'hard times'

You know the knee-jerk reaction to increasing competition in a recessionary environment: Drop your prices and cut, cut, cut.

But you have another option IF you have been successful in your branding and business development -- you can raise your prices, offsetting any loss in volume with your increased margins.

In some cases, you will find you have a double-win: Your sales rise even as your prices increase. In other words, you sell more AND improve your margins.

How can this be?

A large part of the price you can claim relates to perceived as well as real value. And this is the stuff of your brand. If your current and potential clients wish to do business with you because they believe their experience will be rewarding, satisfying, and profitable, they'll pay more.

As an example, say you are being sued for a million dollars (as my business once was). Would you choose (a) the lawyer with the cheapest hourly billing rates or (b) the lawyer with the best reputation in the community for winning similar lawsuits? Thankfully, in this situation you will likely choose the correct response: Here, paying more up front actually means paying less long term-- especially when you win the lawsuit and costs are awarded to your favor!

When should you consider raising your prices? You can see some obvious answers, and some which may be surprising:

  • When you are so busy you can't handle all the order backlog (a nice problem to have). You could elect to incur additional costs, expand, hire more people, or ask them to wait -- or raise your prices to draw out only the clients who really want your services. (This is not likely to be a big issue in the current environment).
  • When your costs are rising; obviously to cover them;
(Now for the more interesting situations)
  • When your prices have been static for some time, even though you have kept the lid on costs, you may find you can safely raise prices without offending anyone;
  • When your brand is strong enough that clients really want to do business with you; respect you; and trust in your competence (the best reason).
Obviously, you don't want to rashly raise your prices when you are engaging in a commodity service business -- but if you are doing that, you don't need to read this blog as you are not marketing effectively! And you need to be sensitive to your current clients. If you are afraid of disrupting established relationships, you can consider grandfathering prices for selected current clients. Some businesses offer a 'last chance' at the lower prices -- this can generate a nice (short-term) bump in sales as people get in before the deadline; the trade-off is you will drain away business in the months immediately after the price increase; when if you had simply implemented the higher prices, the enhanced margin would be yours to keep.

See: Discount, nah "I raised my prices"

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