Silicon Valley legend Marc Andreessen (@pmarca) was on Tim Ferriss’s (@TimFerriss) podcast recently, and Tim always asks his guests what they would put on a billboard. Marc said two words: “I’ve got one, I’ve actually thought about hiring a skywriter to do this one. Right in the heart of San Francisco would be a billboard with just two words on it: Raise Prices.”
The number one thing – just the theme and we see it everywhere – the number one theme with our companies have when they get really struggling is they are not charging enough for their product. It has become absolutely conventional wisdom in Silicon Valley that the way to succeed is to price your product as low as possible under the theory that if it’s low-priced everybody can buy it and that’s how you get the volume. And we just see over and over and over again people failing with that because they get in the problem we call too hungry to eat. They don’t charge enough for their product to be able to afford the sales and marketing required to actually get anybody to buy it. And so they can’t afford to hire the sales rep to go sell the product. They can’t afford to buy the TV commercial, whatever it is. They cannot afford to go acquire the customers.
There you have it. If you haven’t believed me over the years, believe Marc.
There are some markets where you’re selling commodities with zero pricing power, or you’re near-commodity, with limited pricing power, but most small businesses have a lot more pricing power than they think.
Raising prices has a number of good effects:
- You make more money if you raise prices. Even if you lose some of the most cost-sensitive customers (who may have been costing you profit in the first place), you’re going to take home more money. If you have pretty decent 20% margins, a 5% effective price increase raises your profit by 25%. I’ve seen small business owners try to move heaven and earth to take home 25% more money, but act like charging what they were worth was just too challenging.
- You attract better customers. You attract the people who value what you do.
- You and your team enjoy work more. Not just because you’re making more money and you’re not “too hungry to eat”, but because you’re working with customers who value what you do, and don’t treat you like a commodity (face it, that was your fault), you get more interesting work, and you get treated better while doing it.
- You can invest more in growing your business– sales, marketing, paying good people better, etc.
- You can enjoy life more outside your business.
If you’ve read this far, you probably already know that raising prices is a good idea, at least in some circumstances. However, many of us have our internal demons that hold us back.
If you want the simple guide to asking for (and getting) higher prices, click below. There are 2 exercises (only one of which you’ll do) and 2 questions to ask.
Follow Marc’s advice, and figure out how to raise prices.