If you’re reading this blog, you probably know the dramatic profit impact of small price improvements. (For a company running at 10% net margin, a 1% price improvement increases profit by 10%.) Yet even when companies want to improve pricing performance, they often feel like they are at the mercy of the market.
If you’re truly in a commodity market, you are in fact at the mercy of the market. Either focus on your cost, or differentiate to decommoditize.
Few businesses are in true commodity markets. And for a lot of these businesses, especially at the SMB level, the first barrier to improved pricing is the one the business owner can control most directly: themselves. Many business owners look at their costs, tack on a “fair” profit, and call it a day. Or they look at the competition and price a bit below them. Even when costs go up, they often have trouble raising prices.
Your pricing is ultimately limited by the perceived differential value of your offering. I’ll go into more detail on the value side in a later post, but for now let’s think about the amount of value you can capture. You work really hard to create value for your customers. You work proactively to make them successful. Don’t sit back passively when it comes to capturing your share of that value. Pricing is the monetization of value, and you should be just as proactive about that as value creation.
So don’t be the limiting factor on your pricing. If you think you should be achieving higher prices but you haven’t asked because it makes you uncomfortable, you need to fix that. If you are used to giving big discounts when you get nervous in sales cycles even though the value is there for the customer, you need to fix that.
Here are some exercises to help you think about this:
- The Series of Increasingly Outlandish Prices. From Steve Blank, author of 4 Steps to the Epiphany. When the customer asks for the price, keep getting more and more outlandish until the customers pushes back. For example: “It’s $1M dollars. Per month. Plus $2M for setup. Plus 20% maintenance.” The point is to help discover the price for a new offering, but it’s also useful to force you to think beyond “I think it should be about $99.”
- Double Your Price. Someone bursts into your office and holds a gun to your head. They tell you that you have to double your prices in a month. (Maybe it’s your accountant.) What would you have to change about the way you sell, your products, your services, your customers, to achieve this? While you may not be able to actually double your prices, you can make dramatic improvements. We used this method to double consulting prices, although it took us 2 years, not a month, to actually do it.
- Visit a Porsche Dealer. Test drive the fastest convertible on the lot. When it comes to negotiating the price, keep insisting that you are deciding between this car and a Hyundai Sonata that seats 5. Keep asking the sales manager to come back with a better price. After they get done laughing and throwing you out, compare the reaction of the car salesreps to your reaction when customers try to chisel you down on price.
- Say It to the Mirror. It may sound silly, but if you have trouble asking for the price you think you should get, practice saying it to the mirror. Not just the price, but why this is a great deal for the customer. Make sure there is no hint of apology in your voice or your body language.