Here’s some advice that may seem counterintuitive. RAISE YOUR PRICES.

But if you raise prices, you might lose customers, right? That’s certainly possible, and possibly certain, depending on how much you raise them and how you communicate with your customers. Which customers are most likely to leave? The ones who value what you provide the least. The ones who are probably the biggest pain to work with now. If they leave, and you make more money serving the customers who really value what you do, you can spend more time and energy focusing where it matters, to both you and your customers.

What’s better: working 100% of the time for $100 per hour, or working 50% of the time for $200 per hour? Most people would say they’d rather work less and make the same money. Yet many business owners focus on the amount of work, rather than the amount of profit. (Or course, businesses have to cover their costs, and especially in high fixed cost contexts, you may need a lot of volume to make the numbers work.)

You don’t have to double your prices (although I recommend thinking of ways to do it, and at least giving customers the option– you may be surprised at what happens), but even modest increases can do wonders for your bottom line. If you are currently making 20% margins in a high variable cost business like services, raising prices 10% will almost double your profit if you keep volume the same. If you lose 20% of your volume, you still make almost 20% more profit. And you did while working less. So the work that you do, for customers who care, becomes fun again. And you can take that extra time, energy and money, and invest it back in your business, your family, and yourself.

If you don’t like price objections, you could be accidentally killing your business.  If no one ever objects to your price, many of your customers would probably pay considerably more.

Charging a little more has a disproportionate impact on the bottom line.  For example, raising prices 10% from $150 to $165 per hour will likely raise profit much more than 10%.  Since that extra margin goes straight to the bottom line, you might increase profit 20 or 30%.  That sure beats working 20-30% longer!

In addition, pricing objections give you great insight into what the customer cares about.  They are learning opportunities.  You get to learn about the customer, and you get a chance to test your messaging for why your price premium is a good investment.  No objections, no learning.

When you get an objection, there are 4 possibilities.

1. The customer was never a good fit.  You should suggest they go elsewhere.  These are the “I want a brand new Ferrari and I have a $20,000 budget” customers.  If you currently sell them $20,000 Ferraris, you have a big problem.
2. The customer is a good fit for your company, but has legitimate reasons for wanting a cheaper price.  These are the “I want a really fast car, something like a Ferrari, and I have a $50,000 budget” customers.  Maybe they can get a used Porsche 911.  Maybe you can remove some of the value from your offering and lower your price, and/or give them discounts for upfront payment, flexible scheduling, volume purchases, or other behaviors that create shared value.  (See more on how you can Price for Profit.)
3. The customer is a great fit, but wants to see if they can get a better deal.  These are the “I’d love a Ferrari, what kind of deal can you give me?” customers.  They are asking for a discount because they know it can’t hurt.  Make sure they understand the value message, and charge them the right price.  They can get a discount if they agree to some of the shared value behaviors in step 2, of course.
4. The customer may be a good fit, but they are using price as a mask for deeper issues.  These are they “I’d love to buy a Ferrari, but I can’t spend more than $20,000 (because my wife said I could get a Ferrari if I didn’t spend more than that)” customers.  So you say “let’s say we agreed on your price, are you ready to buy today?”  If they are ready to buy, you can deal with the price objection by putting them in one of the previous 3 categories.  If they start talking about their budget cycle, IT approval, the need to get buy-in from their Tokyo office, etc, then you know that price was just a smoke screen.  They have other issues that they may not feel comfortable airing, but even if you lower your price, those issues remain.

Note that customers put themselves into these categories.  The price objection just helps you figure out how to deal with them.  Don’t assume that everyone is in #2 and will respond to lower prices.  This just becomes a self-fulfilling prophecy and teaches your customers in #3 and #4 to act like they need more discounts.

Now consider what happens when you don’t get a price objection.  Either:

1. You priced the offering at exactly the optimum price for that customer, or
2. You underpriced.

So when was the last time you got a price objection? How did you handle it?

1. Customers tend to focus on hourly rates, rather than total project cost, let alone value for money.
2. It’s easy to offer deep discounts to get people off the bench and back to billing.
3. Customers are nervous because the whole reason they need a service is because they don’t know how to do something themselves and they may not even know how to evaluate providers.

When business owners get back on their heels, they find clients eager to challenge them on hourly rates.  They end up working long hours at lower rates, or sometimes for free.  What’s worse than not getting enough work and not making enough money?  Working too much and not making enough money.  This ends up destroying a lot of small businesses, because the love for the work that caused the owner to start their venture in the first place dries up.  As the downturn hit and clients cut back, Smiley’s owner found herself working more for less money and she had to reduce her staff.  She felt she provided good value, but was losing business to competitors with lower rates.  In addition, while her nominal rate was pretty good, she ended up discounting it during the proposal phase, which reduced revenue by about 15-20%, but reduced profit by almost 50%.

So we put together a battle plan.

We started with #3.  Smiley’s founder sensed hesitation in the buying process, and often countered with discounts.  However, this hesitation is because the buyer has to make a leap of faith that the provider can deliver.  Lowering the price does not lower the perceived risk– it may even increase it.  Companies may not come out and say “I’m not sure you can deliver and I’m worried about my career if you don’t.”  They may even say that price is the problem, or mumble something about you being more expensive.  So first, we decided there would be no discussion of discounting initiated by Smiley.  If the customer asked for a price break, there would be a discussion of value (issue #1).  If the customer still wanted to discuss price, Smiley would discuss lower priced options (see below for more discussion of issue #2).  If the customer still complained about price, Smiley would ask “What price do you want?  And if I gave you that price, would you sign today?”  Note that you don’t actually have to give them the price they want.  You just want to know if price is masquerading for something else.  Maybe they don’t really have budget.  Maybe they are trying to “lock in” a good price for the future.  Maybe they want to use your quote against another vendor.  Find out, but don’t commit to any discounts until you know if that’s really the problem.  If they want a price break, ask for something in return.  The best thing is to reduce the scope of the project.  If this is not practical, ask for payment upfront, early payment, a video testimonial, or something else that shows both parties are collaboratively creating and sharing value.

Now that we knew we were not going to just start throwing money at risk, we had to address customers’ concerns with hourly rates.  There are a few projects that were standardized enough that Smiley could do them on a fixed fee basis.  Smiley raised the price of these.  Some work still had to be done hourly, however, and Smiley’s owner had trouble quoting her rates confidently.  She sounded almost apologetic asking for money.  If you want to be a premium provider, you have to give a premium experience, and that includes quoting your rates and prices very confidently.  If you walk into an Apple store or a Lexus showroom, you won’t find salespeople apologizing for the price.  They simply quote it.  And if you say “but I can get a PC for half the price”, they can talk to you about why their offering is better.  You can agree, and buy it, or disagree, and go elsewhere, but they aren’t going to sell you the Mac at the PC price, or the Lexus at the Honda price.  When you are confident about your pricing, that shows that you’ve been around the block a bit and increases the customer’s confidence in you.  So the whole idea on issue #1 was the simply quote the price.  (She practiced in front of a mirror.)  If customers mention cheaper competitors, never apologize for your price.  Explain that of course they are cheaper, because of x, y, and z (in this case, because Smiley used industry veterans and competitors used recent college grads).  Note that the customer still has a choice.  They may decide that cheaper is better for them.

Before you let them go, though, let’s get to issue #2.  Rather than simply discounting, especially when benchwarmers are burning a hole in your cash reserves, think about some ways to transform the project to make everyone happy.  Maybe the company really wants to go with you, but simply doesn’t have the budget.  You can break the project into smaller chunks and do them sequentially.  Or perhaps parts of the project are mission critical and others are on the checklist but not really as important.  Smiley’s battle plan for price objections therefore included ways to change the scope of the project without undermining pricing integrity.  In addition, Smiley developed ways for customers to save money on non-urgent projects.  Smiley developed a retainer plan and offered discounts for work with more distant deadlines.  This way customers could save money by planning ahead, and Smiley benefited by doing work in time slots between more pressing projects.

How did it go?  Smiley’s owner has not discounted outside or her defined plan, or lost a deal.  Her passion is back, and she added “actually having a pricing plan paid for my new patio.”

Have a pricing battle plan ready, so that in the heat of the moment, you can simply execute your plan.  Small business owners who have done this report less stress, faster deal closing, and higher margins.  Why?  Let’s look at two examples, one today and one next week.

First, a software company selling to other business was trying to figure out how to respond to quote requests based on number of users and other parameters.  Each time they got a request, they tried to figure out what they needed to do to win the business.  Since price was the most obvious lever they had, they spent a lot of time and energy debating the right pricing and discounting.  This led to an over-emphasis on discounting, and an under-emphasis on other aspects of the solution, which were often much more important to the customer.  In many cases, they offered discounts preemptively and unnecessarily.

Then they put together a plan.  The software would cost $X per seat, with volume discounts available at certain quantities.  They defined additional discounts if customers would commit to certain contract lengths, or if they would pay up front.  This tied discounts to exchanges of value, rather than just giving away money.  All quotes would come from this plan.  (See software to automate this pricing process.) Sounds great until customers push back against the price, right?  The CEO new this would be a problem, so the plan defined what would happen at this point.  First, rather than just discounting, the sales team would try to understand if price was really an issue, or just fishing for discounts.  (Many of us have trained our customers to do that.)  Then they would explain the value to the customer.  If there were still price objections, and the company still wanted the business, they had a predefined threshold for additional discounting.

What happened?  Most companies just took the quoted price.  A minority pushed back, and most of them were happy with the additional value conversation, and/or taking advantage of the predefined discounts.  Only a handful went to discretionary discounting.

By having a plan and having confidence in it, sales increased, stress decreased, and margins went up over 20%.

What’s your pricing battle plan?

From a pricing perspective, Amazon has done a nice job of filling various nitches, from the $79 basic Kindle (with ads–oh, sorry “Special Offers”, $109 without), to the $99 Kindle Touch (with ads, $139 without), to the $149/$189 Kindle Touch 3G and the $199 Kindle Fire. $99 and $199 are “magic” price points, that tend to increase adoption of electronics devices faster than slightly higher price points.

So is the Kindle Fire an iPad killer?

First, it’s worth noting that Amazon has already had a lot of success with the Kindle as an ebook reader. They are committed to this market, unlike some other entrants. They have great content to provide a compelling experience, and can take advantage of their cloud storage expertise to sync everything to the cloud, while saving costs by only providing 8GB of onboard storage (they do have a USB port). And for people who mainly want to consume media on this device, the price is compelling. (Note that for reading, the black and white Kindle’s are far superior to the more expensive color screens on the Fire and the iPad, both on the eyes and on the battery.) Much of the rest of the Fire experience will depend on the depth and quality of the applications available, an area where Apple has a huge lead. Apple also provides more storage, camera(s), and microphone– so if you want to make voice or video calls, the Kindle is not for you.

There are all kinds of feature/benefit comparisons you can do to find out which device, or any, would be better for you. But the pricing and user experience differences are born of the companies’ different approaches. Apple makes money from selling devices, and they have a huge software and media ecosystem around that to provide a good experience (and which now makes what most companies would consider a good deal of money). Amazon makes money from people buying content, and they sell devices as a means to encourage content purchases. Indeed, it is thought that Amazon is losing money on each Kindle Fire sold. What is right for one company may not be right for another. Both Apple and Amazon do a great job crafting a pleasant (valuable) user experience, and they price to their target market. While there is considerable overlap, there’s also a lot of differentiation (and a lot of people who already have both an iPad and a Kindle).

To draw lessons to apply to your business, you don’t have to attack another offer head-on. Take what your customers will care about and design the experience and the price around that. Amazon has done that, and that’s why their tablet effort will be much more successful than more traditional electronics manufacturers who simply tried to copy the iPad while adding a few more features or charging less money.

At this point, you’ve done the hard work.  Hard work meaning that it’s hard to go back and change it.  So you’re stuck pricing what you created.  The typical train of thought goes like this:

Product > Cost > Price > Customer

Now when you get to the customer, you don’t know if you’re delivering the right value, making it harder for sales and marketing to find prospects and close sales.

Imagine instead if you had started with a customer problem.  You could then figure out how customers tried to solve that problem today and how much better, if any, your solution would be.  How much would it be worth to the customer?  Given that value, can you product the product or deliver the service profitably?  What might you have to change?  At this point, it’s easy to change, because you haven’t done the hard work yet.  This train of thought looks like this:

Customer > Value > Price > Cost > Product

How do you think about price and value?

24 ounces of ketchup at $0.07/oz.

Turn that idea on its head.

32 ounces at $0.079/oz.  The price per unit goes up almost 13%.  Not bad for a commodity.

Note that the different sizes make it harder for buyers to know exactly how much more they are paying.  But hey, who doesn’t like upside down ketchup bottles.  You can probably even make the case that you end up wasting less ketchup.

First, we have to get rid of some assumptions. Pricing is not a number that you chisel in stone after you have developed your product, marketing, and sales. Pricing is a process that evolves over time, in concert with your product, the other “P’s” of marketing, and your market. Next, price is a function of your offering’s perceived differential value. So understanding how customers perceive the value they receive relative to alternatives is essential for good pricing.  Of course, most companies go to market without a clearly thought-out pricing story.

So now you’re out in the market with your price.  Prospective customers– those who might actually want the offering, not just the people in the surrounding parts of the market that you included in your optimistic scenario– can have 3 responses to your price.  Note, we are assuming you have already filtered those who don’t really want the product.

First, they can say, “OK, I’ll buy.”  This is generally a good thing.  Although if they never say anything about your prices, chances are you’re leaving money on the table.

Or, they might say “sounds good, but it’s out of my budget.”  Most savvy buyers know that they should say this, even if they are willing to pay the price.  Many vendors immediately start discounting. Sometimes, a buyer doesn’t even have to express a problem with the price and the vendor will sound defensive and proactively cut prices.  So first, you have to understand if price is the real issue, if the buyer is just asking for a discount, or if the price objection is a smoke screen for other issues.  To rule out the last scenario, you can ask them “if we gave you the price you want, would you buy today?”  If they say “yes” then you can go on to dealing with the pricing issue.  If they start talking about other problems, then you know you have to deal with those issues.  Cutting price will just hurt your margin without getting you anywhere.

If it is a price objection, you will of course have your value message ready, right?  If the buyer has faith in the value message, you may be all set.  If they object to the value message, they may not really be in your target market, or they may just not care about some part of the value. So instead of just lowering the price, you need to take that value away.  Then the prospect may be ready to buy, or, they may come back and say “wait, actually, I want that premium service plan.” If enough folks don’t see value in the service plan, though, they are helping you develop your lower cost offering.

Some other prospects may say “sounds good, but what I really need is [some other high end feature/benefit that you don't provide].”  Now you can ask what that would mean, how they would use it, what they would be willing to pay to get it, and so on.  The customer is helping you develop a higher end offering.

Objections to your price and product are not necessarily bad.  They’re valuable feedback that you can use to refine your offerings and your pricing.  Pricing does not have to involve a PhD in statistics or a (very expensive) pricing consultant.  Your customers and prospects will do a lot of the work for you.

First of all, Netflix is a data-driven company.  They have lots of data and they are constantly trying to use it more effectively.  They sponsored a $1M contest to see if independent teams could improve on Netflix’s algorithms to suggest movies you might like based on what you have already seen.  They know how much money they make on what kinds of subscriptions.  (They even got in trouble a few years ago for “throttling” or slowing down the shipment of “unlimited” DVDs to people who watched a lot.)  So they knew, before they changed prices, what kinds of changes in demand and volume and price would be profitable for them.

Speaking of profit, the goal for Netflix is making money, not shipping DVDs or streaming videos.  Since they pounded Blockbuster, they have emerged as the leading source for movies and TV show reruns.  And you can make a good case that they have been underpricing for some time.  Streaming is the future, so Netflix is not interested in subsidizing the DVD business for $2/month on top of the streaming fee.  If you want DVD’s, you need to pay $8/month at a minimum.  This will allow them to actually make money on the DVD side of the business.  Some people will probably quit and rent from kiosks like RedBox instead, but these are customers at the margins.  Netflix probably has good data to estimate what portion of their subscribers are likely to leave for kiosk services.

What about other alternatives?  Does anyone really want to drive to Blockbuster anymore?  Amazon Prime members get free streaming videos, although their selection is probably even worse than Netflix’s on-demand line up.  Cable companies and Apple offer on demand rentals, usually with a much better selection of new releases, but these videos cost about $5 a pop, on top of your cable subscription, so it’s not exactly a cheap option.

In other words, the value from Netflix for cost and convenience is pretty hard to beat, even at the higher prices.

Netflix has a couple of weak spots, though, related to content.  When they started, they were small, and useful threat for the studios against the dominance of Blockbuster.  (Blockbuster got greedy, which is why we have new release movies for sales for less than $20, but that’s another story.)  Netflix also managed to acquire streaming rights from Starz, which were cheap at the time.  When that agreement expires, Netflix expects to fork over much more money to the studios.  They also need to expand the on demand library, which might enable them to get out of the DVD business altogether.  The amount of content available and the price Netflix will have to pay for it are still up in the air, but Netflix is getting ready for a larger showdown with the studios.

Unless you’re a Netflix customer, none of this may matter to you. But what lessons can you apply to your business?

First, do you know how profitable your customers are?  Most businesses make over 100% of their profits from about 20% of their customers.  They break even on 70% or so, and actually lose money on some customers.  Your pricing plan should encourage those money losing customers to either make you money or take their business elsewhere.

Can you model the impact of price, cost and volume changes?  If you know your customer profitability looking backwards, that’s helpful.  But what you really want to do is figure out what it will look like in the future, based on certain assumptions, like changes in price, volume, and costs.  Businesses have an almost inherent fear of “losing customers”, even though losing customers can increase profits, especially if price increases are involved.  Unless you have a model to help you understand the bottom line impact of price, volume, and cost changes, it’s hard to make good decisions, and you’re likely to underprice out of fear.

How dependent are you on key suppliers?  Netflix is a distributor.  They deal with much larger studios (and cable providers, whose pipes are necessary to bring online content).  The studios are afraid of Netflix turning into an online Blockbuster, which could then control the industry.  They are well connected politically, and despite being strategic idiots, they have good lawyers who know how to extract the most value from a given transaction.  If you are beholden to key suppliers, your cost structure and pricing structure are also beholden to those suppliers.

By the way, I don’t think we’ve helped anyone push through a 60% price increase this year, but we’ve a couple of companies increase prices more than 30%, with minimal impact on sales and a huge impact on profit.

(Image source: Wikipedia)

This is the unattractive and unattractively named Patagonian Toothfish.  You probably haven’t seen it listed on too many menus.  However, some chefs noticed that it cooks really nicely and tastes delicious. But how to get people to order it?

Call it “Chilean sea bass”, of course.  It’s now a staple on menus at high-end restaurants and so popular that the stocks are no longer sustainable at current consumption rates.