First step in running a profitable business: don’t be scared of making money

In my line of work, I encounter a lot of small business owners who set their prices by copying the “going price” in “the market” or by sticking their fingers in the wind.  This is unfortunate, but fixable.  What really frustrates me are when those same people, years down the road, are trying to figure out how to make more money when they haven’t changed or raised their prices.  (Really, if you haven’t raised your prices in 5 years, you’ve actually lowered your prices by 10%, due to inflation.)

I’ll ask why they haven’t raised prices and there’s some hemming and hawing.  What it comes down to is that the owner doesn’t think he or she is worth it.  “I know we’re the cheapest option for our customers, but isn’t $125 an hour a pretty good rate?”  Or, “I guess I just never saw myself as a guy making more than $100,000 per year.”  Or, “no one else in the industry is raising prices.”

Some of these folks run very successful businesses, but they are:

  • Making (a lot) less money than they could
  • Working (a lot) harder than they need to make the money they want
  • Feeling controlled by their business instead of the other way around

When I ask about the value they deliver to their customers, they believe it’s there.  They believe it could be worth more.  But they are scared to ask for it, but asking for something means you might get rejected.  This is always the case, but you’d think that people who are brave enough to start a business would be brave enough to ask, right?  Well, we’re social creatures, and being rejected can be hard for anyone.  Some people know they need to raise prices, but don’t know how.  (We’ll deal with that in another post.)  Others really don’t want to go through the psychological trauma of asking for something.  Here’s the thing: the customers most likely to say “no” are the price-buyers– the ones you don’t like to deal with because you make little to no profit and they eat up all your time and energy.  In a free market, customers get to decide if they want to buy what you’re selling on your terms.  But you get to set those terms.  Customers don’t.  (Obviously, if your terms are out of whack with the market, you’re going to be in trouble.)

If the value is there, ask for the price to back it up.  Why wouldn’t you be “worth it”?  Professional athletes make millions of dollars playing games.  Are they “worth it”?  In some cosmic sense, probably not.  Remember when Kobe Bryant’s agent said “it seems silly to pay basketball players more than high school teachers, who are much more valuable to society, just because Kobe can put a little orange ball through a little orange hoop.  Kobe has resigned with the Lakers for $25,000 per year, which is really a lot, considering he’d happily play for free.”  I don’t remember that, either.

Back in the 60s, bands and promoters would split concert receipts 50/50.  Then Led Zeppelin showed up and sold out every venue they played.  Their manager said, if you want Zeppelin, it’s a 90/10 split.  And he got it, because the band delivered the value.

If you’ve currently got 20% margins, a 10% price increase will increase your profit by up to 50% (depending on your mix of fixed and variable costs).  But let’s say you don’t retain all your customers.  As you feared, many decide to go elsewhere. Fortunately, you lose the most price sensitive customers, the ones who don’t perceive much value in what you do.  You can have a conversation with them, to see why they don’t perceive the value, and perhaps change their mind.  But at the end of the day, you’re still making more money, and you’re not dealing with your worst customers.  You can concentrate on the ones who value what you do, the ones you like to help.  In addition to making more money, and spending less time and energy on work, you’re also creating more meaning.

Naturally, most small business owners are not basketball or rock n’ roll prodigies.  You have to deliver the value.  If the value isn’t there, go back and fix that.  But if it is, you should get paid for it.  Don’t be scared of making money.

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