A friend of ours named Mark, is a very successful small business consultant. Without giving away all his secrets, there is one thing that works practically every time for his clients, and that’s convincing them to raise their prices.
For a small business that’s extremely tight on cash, making the decision to pay a consultant is not easy at all. But for those that do it, Mark says they are initially shocked when my first suggestion is to raise prices, which will in turn increase their margins. “Raise prices?! I could’ve thought of that myself. What do I need you for? I’ll lose customers if I increase my prices!” Surprisingly, most of Mark’s clients have no basis to make that claim because they don’t know the true price point of their customers.
Am I Competing on Price?
Mark shared the story of the job he did for a restaurant called Bill’s Steakhouse. The establishment was well-known for its juicy steak and garlic mashed potatoes. Cash flow was so tight that the owner would on occasion have to push payroll to the following Monday just to cover it. So when his small business consultant told him that it’s time to raise his prices, his response was that he couldn’t because there was a competitor down the street that was charging exactly what he was. If he raised prices, he feared he would lose customers to them. His fears were unfounded. Bill’s Steakhouse was known for being the best steakhouse in town, not the cheapest in town. It turns out that customers wouldn’t mind paying more for a satisfying meal and that higher prices actually furthered their belief that Bill’s Steakhouse was providing all around better quality steak than anywhere else. Mark says that customers will pay for quality.
According to an Inc. article, “Low-price shoppers are loyal to price, not to you. So if the competition decides to squeeze you out with even lower prices, a lot of your hard-won customers will be gone in an instant.” So why cut your margins drastically for customers that may never come back?
Increasing the price isn’t a cure-all solution but if you believe your product or service is top quality, you should be charging more than enough to earn a profit. You don’t need to compete on price.