Why it's time to put up prices
Bosses agonise over them, sales reps fear them and customers hate them - but don’t let that stop you putting up prices.
Author David Abbott says too many firms are engaged in a price war that has no winners, when a different approach could lead to peace - and prosperity.
Rock bottom prices generate little or no surplus cash that can be reinvested for growth, leaving a firm vulnerable to shocks, from a VAT bill to commodity price hikes, he says.
And they can be forced to borrow money or make people redundant to survive.
In contrast, higher profit margins mean there’s spare cash to spend on new products or staff.
If a firm’s net margin is 10 per cent and it puts up prices five per cent, the extra is almost all profit.
And it can afford to lose a third of sales and still make the same amount.
Mr Abbott, marketing director and pricing expert, said: “Would you like to be a third less busy and making the same money?
“No one wants to feel like they are losing a sale, so they go in low.
“Sales teams say, ‘if only the product was cheaper we’d sell loads more’. Every single conversation tends to be on price and you can start thinking it’s the only thing that matters. But only one company can be the absolute lowest.
“Most firms base bonuses on revenue. It’s easy to measure and has been common practice for years. But it is profit that matters and bonuses should reflect that.”
Higher prices might be just the tonic a company needs, but it is the customers who have to swallow it. And that is mostly psychology, David adds.
No price is ever considered in isolation, it is always compared to something, so make the choice between your products.
“Think what a customer might require, perhaps offer the product plus maintenance, or plus training, then the comparison is between the three things you suggest. Make the conversation about you.”
And if you present three prices, make the first one the highest - then everything else is compared favourably to that.
Prices that are precise, not rounded, are subject to less negotiation, David adds.
“£5,160 sounds as though there’s some science behind it, compared to £5,000. The fewer zeros the better.”
As a rule of thumb, a profit margin of 10 per cent is where a lot of businesses settle, he added.
David Abbott is author of How to Price Your Platypus, available on Amazon.