Great pricing tips to increase your profitability
increase_profitSetting your pricing at the right level, in a good structure with the right promotions is THE quickest and cheapest way of improving your profitability. Often dramatically.

Why is changing pricing the last option that we chose to implement? Too little time is spent by mid-tier and SMEs businesses on getting their pricing right.

Human nature plays a large part in this. We generally want to please our customers and we fear the unknown and possible conflict. E.g. how will our customers react to changes in our price? Will they be angry/confrontational? This is rarely the case in practice.

Price is only part of the equation of why most of our customers buy from us. Review your pricing today. Your profitability will benefit.

 

1 – Understand what you charge today

Pricing is not just about the headline price. How do you structure your pricing through the range of your products and services?

Do you offer promotions? What types? How do they affect volume and profitability?

Do you just offer just products or just services? What opportunity do you have to offer both?

Many businesses, small and large, do not track and analyse exactly what pricing is being charged net of promotions. Understanding your cost base by product or service is also critical to ensure that all products or services are sold above cost. Focus on driving volume of your highest margin products / services.

If you do not track this information today, start putting in place processes or IT that will enable some level of tracking.

Stop any promotions that make a loss.

Increase the price of any products or services which are loss making.

 

2 – Understand the Value offered vs cost charged

Most customers do not want the cheapest – the majority are looking for the best value for money.

Value for money is not the same as cost. Cost is only one element. In every buying decision the buyer is deciding if the benefits they receive exceed the cost charged for those benefits.

Are you clear about the value offered by your product or Service? Are your customers also clear? How does this compare to the cost you charge?

Getting this balance right and in the favour of the customer is critical.

Understand the benefits of your product / service that is valued by the customer. This is a great step in being able to set pricing and helps during the sales process. Ensuring the customer understands the relevant benefits to them often changes their perception of value.

Some examples of added value:

  • Credit terms
  • Guarantees
  • Return policies
  • Free delivery
  • Speed of delivery
  • Great customer service
  • Technical support or advice
  • 24 hour support
  • Stock of spare parts

 

3 – Price based on value

Most businesses price in one of the following way:

  1. Cost plus
  2. Price set in relation to the competition
  3. Best guess
  4. Last year’s price plus an increase of x

Most of these approaches are not related to what your customer views as valuable.

Ask what your customers think of the value that you offer? This can be done is variety of ways. How big is the gap between perceived value and what you charge?

If perceived value is significantly greater than price charged, then increasing price closer to the perceived value will increase your profit.

If this gap is small, then what can you do to increase the value or perception of value to your customer?

 

4 – Try not to offer cash discounts

Offer additional value after going through the benefits of the product / services. i.e. it should not the first thing that is done (as is often the case)

Offering cash discounts is the most expensive form of transferring value to the customer. The full value of the cash discount goes straight to your profit line.

Offering “free” products is a cheaper (assuming they have a profit margin) and is effective. This can be tied in to volume levels, customer loyalty, spend levels and similar. You might be able to add slow moving stock items as the free products, further reducing the cost to you but maintaining the value transfer in the eyes of the customer.

 

5 – Regularly review your pricing

Do not leave this critical process to a once per year activity.

Regularly review your pricing against the market place, competitors, and the value that you are providing. By doing so, you will be maximising your ability to earn profits.

 

Be brave – increase your pricing by a few percent today.

Contact us to improve your pricing and profitability.

 

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