This is one of a series of occasional articles about dealing with the downturn and what you can do to get your business fitter to survive, whilst many of your competitors may fail. The idea of Taking Your Business to the Gym comes from the view that over the last 8-10 years things have relatively speaking been easy. Company liquidations have been at low levels both consumer and business to business markets have been strong and companies have had no real pressure to look at themselves and seek improvement. Many have but most have become a little complacent over optimistic and so flabby. This recession has thrown an assault course in the way and you've got to get fit quickly to make it through.
Pricing is perhaps one of the most misunderstood issues in business, if used properly it's one of the simplest ways to help you maximise your profits. Easy then, so what's the problem?
Simple question: who sets your company's prices is it determined by you or the market?
All those who said the market – Your Wrong – it's YOU! It's one of the most basic misconceptions about business whilst the market might dictate general pricing levels individual companies set their own prices. The problem with owner managed business is that they assume that they must be the cheapest to survive. If I had a £1 for every time I've heard this I'd be very rich – sadly I'm not.
Why do so many people think like this? It's conditioning, let me give you some examples
You're visited by a salesman who can't articulate the benefits of his product. What do you tell him when he asks for the business, I'm sorry but it's too expensive.
You're visited by a salesman who you just don't like. What do you tell him when he asks for the business, I'm sorry but it's too expensive.
You're visited by a salesman who just doesn't get the point you're trying to make. What do you tell him when he asks for the business, I'm sorry but it's too expensive.
You're visited by a salesman who's too pushy. What do you tell him when he asks for the business, I'm sorry but it's too expensive.
You should be getting a message by now pricing is rarely the issue, price objections are mostly a cover for some other objection. So why is it we know we're not telling the truth when we hide behind price, but assume others are telling the truth when they tell us we're too expensive. I really can't explain I can only assume that we just don't want to face the real issue so we accept pricing as the issue.
So now you know let's look at what you can do. Well one thing you could try is to increase all your prices by 1% immediately. Why, because you can; if you're selling something for £100 pounds people aren't going to stop buying it because it now costs £101.
I can't we're in the middle of the worst recession in living memory you must be nuts – you say.
I say – no, its your conditioning that says that. I can in all honesty say that in almost every company I work with; one of the first things I do is to get them to increase their prices and having done so they are surprised that they don't lose any customers in the process. Yes even in the worst recession in living memory. Why? Am I a genius – I hope so – but no. Am I a magician – no. The answer is almost invariably, because companies are selling their product or service too cheaply because they've been conditioned that "Cheap is Good".
Realistically as a small business owner you should understand that whilst price a factor in purchasing its by no means the main factor, people tend to buy more on quality brand capability and service. Your price therefore, should reflect your costs and be sufficient to give you a decent profit. So in order to price correctly you should have a detailed analysis and understanding of your costs. This is something that many businesses don't have, only by understanding what and how your costs are made up in detail can you accurately set your prices over the long term. Whilst the general rule the sales price is 2.4 time manufacture costs, it's still a rule of thumb and likely to lead to a gestimation of costs which will almost always be less than the real costs.
As a general rule you should be increasing your price at a minimum annually to keep in step with inflation and also when there is a major change in the price of components. Don't worry if you are not the cheapest because it is rare that you will be as there is always likely to be a business with a lower price. Anyway you don't want to be the cheapest because at those levels there is no customer loyalty.
Finally your price should reflect your product position. Simply put you can't offer a Rolls Royce product or service for the price of a Ford, unfortunately many business owners believe that's the only way they can survive which is often the very reason they don't.