3 Steps To Increase Profits by $50,000 in One Year
One of the biggest frustrations many business owners have particularly in the Manufacturing, Trades & Technology Sectors are lost profits due to underselling their products and services.
I had a conversation with a Contractor in Surrey last month. He felt that he had to discount his prices to ensure he got the job. I asked what the customer’s reaction to the price was when they heard it. They responded with an immediate “let’s do it”.
When we give a client a price they usually answer in one of three ways. (1) “That’s Expensive” (2) “That’s Cheap (or a good deal)” (3) “That’s fair” which means it is about what they thought it would cost.
How did the customer determine whether the price was “high”, “low” or “about right”? They based their perceived value on their past experience with competitors and the overall benefit the product will provide their life or business based on how it was presented.
I suggested to the Contractor that he raise his price in increments of 10% on future quotations and to watch the reaction of the customer. When the customers stop saying “that’s cheap” or immediately say “let’s do it” you have hit the balance of price vs. perceived value.
I asked the Contractor about a month later how things were going. He said he was able to increase his pricing by 20% and didn’t lose any jobs. According to the Contractor this will increase profits by over $50,000 per year.
Here are three easy steps to determine perceived value.
- Determine the unique features and benefits of your product. What are the additional benefits your customers will receive from the unique features of your product? Can the customer expect a significant cost saving or substantial improvement to their quality of life?
- Benchmark against your competition. Use your competition’s pricing as a base line not as the target price. For instance, if your competitor sells their product for $1100 but your product can save the customer $500 more per year you may be able to justify charging $1495 by showing how investing the extra $395 up front will pay back $500 per year in perpetuity.
- Take note of how people react to your price as mentioned above and don’t be afraid to increase pricing in small increments until you are comfortable that you have hit the “sweet spot” between price and perceived value.
Also keep in mind the price sensitivity of your product. We all have psychological price points. A product that sells for $1100 with low price sensitivity could just as easily sell for $1495 without losing any sales as the customer considers the price of both to be very similar yet it represents a substantially increase in gross profits for the seller. This one simple strategy alone can add 50% to your bottom line.
Remember, effective pricing is based on the perceived value of the customer not by your cost plus a mark up.
Tony Malyk, Vancouver Business Performance Coach