Raise Your Prices And Stop Discounting
Getting your pricing right is essential to business profitability, and many of you are not charging enough and/or discounting too often. Why? Read on.
A friend of mine has a business that provides professional services to business. Her business is relatively new. Recently I was helping her re-create the business in a way that made more sense for her situation. There were a number of issues, but some of what I found was:
She was charging on the low end of what people in her business charge per hour.
Given the way she was doing business, she was at the maximum amount of business she could handle well.
She spent lots of time offering consultations to her clients for free.
She did initial set-up work for free, and did not charge for time and mileage when she went to a client’s office.
She was stressed out every day.
There were a number of other things that were going on, but they aren’t relevant to this article.
The first question I asked after determining what she was trying to accomplish with her business was, how come you don’t charge more? Is it that the field is that competitive or are you afraid to ask for more? After a little discussion, we determined that she didn’t have the confidence to raise her prices. Given that she was already doing close to the maximum amount of business she was able to do given how she was doing business and what she was trying to accomplish with the business, it made total sense to raise prices and see what happened. Over the course of a month we tested various price levels and found out that she was getting customers at a price level 30% higher than what she was originally charging. All new clients now pay the 30% higher rate. Over time the rate for existing clients will be raised. Either they agree to pay it or they will have to find someone else. She will then replace the lost clients with new ones at the higher rate.
The next step was to start charging for all the work she was doing. In evaluating her time and revenue records by client, it turned out there was great variability among clients in terms of revenue per total hours worked. The reason was she wasn’t charging when clients called her and she spent 15-30 minutes walking them through some issue they were having. Further, she wasn’t charging for any research that needed to be done to service the clients’ accounts. She also wasn’t charging for time and mileage when she needed to go to a client’s facility.
We agreed that she would charge for all client support calls as well as for research about how to meet the clients’ specific requirements, and charge time and mileage for one way to the clients’ facilities. This created more revenue while reducing extended client support calls, unnecessary client research and unnecessary visits to client facilities.
My friend was not charging enough for her work, and was discounting in terms of doing client work and trips for free. She has increased her revenue and revenue per hour worked. In order to accomplish this, she needed to be willing to lose some clients and some new client opportunities. That was hard, but necessary. The funny thing is, she is still getting more clients than she can handle.
I have several questions for you:
Are you charging enough for your product or service? Are you sure? How do you know?
Is there a way to test raising prices with certain customers, new customers or in certain product lines that you haven’t tried?
Are you discounting unnecessarily? Have you tried holding your pricing firm to see where the line between keeping customers and losing customers really is?
Have you established enough value with your customers to ask for the higher price or avoid discounting? If you haven’t established value, all there is to talk about is price.
Although you can and should manage expenses aggressively, the majority of your profitability will come from decisions you make about revenue. And although more customers are always good, an excellent way to raise revenue and profitability is to raise your prices and stop discounting. Remember, virtually every dime of a price increase drops straight to the bottom line and every dime of a discount comes straight off the bottom line.