"Competing on a factor other than price may allow a business to charge more for their product" ... Gareth Jones. Photo: Louise Kennerley
Increasing prices can be tricky at any time, but in the current soft economy small businesses risk losing customers if they mishandle the price rise.
Many companies are holding back from pushing up their prices, according to the latest Business Expectations Survey from credit agency Dun & Bradstreet. Only about a third of firms expect to charge prices higher than they were a year ago, while 13 per cent will charge less.
Businesses need to balance their need to increase profits against the risk of scaring customers away, particularly if they charge more than their competitors. But Dun & Bradstreet chief executive Gareth Jones warns against making what competitors are charging the only consideration.
“Before a company determines how to price its product it needs to consider its overarching strategy. Essentially, this means deciding whether they want to position themselves as a low cost provider or if they’d prefer to focus more on a niche area,” he says.
“Competing on a factor other than price may allow a business to charge more for their product because they are offering a benefit to the customer that is over and above what their competitors are providing.”
A key consideration that is often overlooked by small business owners is to how much they need to charge to cover expenses and make a profit.
Small business consultant Greg Chapman says it’s surprising how many businesses operate at a loss because they’re not charging enough. “The first step is to understand your margins because you need to cover your overheads to generate a target net profit, and that’s after you pay yourself a decent wage,” he says.
Experts recommend testing the new price on a handful of customers before passing it on to all customers.
“You test the elasticity of pricing – you put it up a little bit and see if you can get away with it, then you put it up a little bit more,” says Kirrily Dear, founder of small business consultancy Eyes Wide Open.
“We test on clients we don’t mind losing so much, so you don’t do it on your top clients because you could end up alienating them and really causing problems for your business but we do it with the C and D type clients, the ones who you’re not too concerned about losing.”
Retailers, who generally have to pass higher prices on to all of their customers, can try out the increased charges on a quieter day of the week, when there is not so much custom at risk.
Businesses can try raising prices in small increments, by pushing them up say 5 per cent initially, and if that sticks then by 10 per cent.
Communicating the price rise to clients also needs to be handled sensitively.
“You certainly don’t want it to be a surprise for your major clients; if you’ve got some major contracts in place with clients you want to have a very good conversation with them about what you’re doing and why you’re doing it,” says Dear. “In most situations, if you’re a small business and they’re a large business they understand the need for you to be financially healthy.”
In fact, customers are likely to know if a business is charging less than the market rate and be more likely to accept the inevitable price rise.
Businesses can use various strategies to make their price rises more palatable, such as bundling products together or introducing new or improved products or services.
Chapman, the author of the book Price: How You Can Charge More Without Losing Sales, says businesses need to break the link in customers’ minds between the cost of production and the price.
“If you can’t communicate your points of difference and the value of your products and services, the only reason people will chose to buy from you is because you’re the cheapest,” he says.
“You want the purchaser to focus on the value of what you provide rather than how much it actually costs to provide it.”
For instance, service providers should consider charging a flat fee for a service rather than a high hourly rate. “With a flat fee, all they see is the value of a fee to solve the problem, whatever that problem is, so they’re focussing on the value rather than the hourly cost of the professional,” says Chapman.
- Cost plus : Adding a standard mark up to the cost of the product or service
- Value based : Determine what the buyer perceives as the value of the product
- Proportional : Set prices in proportion to a larger project or sale
- Going rate : Charge the same as your competitors
SOURCE: Eyes Wide Open