Mary shook her head. “Are you kidding? I can’t do that. My customers would drop me in a heartbeat.”
Brad smiled. “Okay,” he said. “Then tell me how AEC gets away with it.”
“Well, they’ve been at it a long time. They can afford to lose a few people if they raise their prices. I can’t.”
Brad and Mary had been meeting every other week for the last two years. Both had launched their businesses around the same time. They liked to discuss ideas and help each another deal with the challenges of owning a company.
“But when is it ever the right time to go up?”
Mary thought for a moment. “I don’t know,” she said. “but I need to find more customers first before I worry about that.”
Most small business owners work hard to take care of their customers. They also know their product or service is probably worth a lot more than they charge.
And while they would love to raise prices, they aren’t sure how their customers might respond. Besides, it’s tough enough to sell at current price levels. The last thing any business owner wants to do is raise prices and send customers running to a competitor.
Yet certain brands manage to thrive while charging more than everyone else in the market.
Many of us assume these premium brands have, in some way, earned the right to reign supreme. But in truth, they follow a strategy that allows them to sell at higher margins.
In this article, you will learn:
- how to raise our prices without damaging your brand
- when to raise prices and when to leave them alone
- how to tell customers you are raising prices
Mind Over Matter?
There is a theory that mindset is the reason so many business owners struggle with pricing. This idea stems from the limiting beliefs they may have around money.
Some people feel guilty for making money. Others are afraid that making a lot of it might have negative consequences. Still, others can never make enough, which can create other problems.
While each person has their own view of money, there is no doubt that it affects the way we do business.
It also influences how we price our products and services. If you’re afraid of charging too much, you may never achieve your full earning potential. After all, if you don’t believe people should pay you more, no one will try to change your mind.
But before you can raise prices, you must first develop the mindset that your offer is worth more. Premium brands don’t think their products and services are better — they know they are.
How Much Is Too Much?
Many small business owners use the wrong pricing method from the beginning. They set prices based on what they think people will pay. This is really a guess that isn’t supported by real information.
To compound the problem, they sell using many of the same “reasons to buy” as their competitors.
Not only does this approach usually result in undercharging, it commoditizes the business. There is no special reason to buy from you because your stuff looks and sounds like everyone else’s.
Still, a lot of businesses use competitors’ prices as a baseline for their own (known as the Competitive Pricing Strategy). They believe that keeping them in line with averages will help them overcome cost comparisons.
Using competitors’ prices to set yours puts you at risk to sell at margins that are too low. You may win some sales, but it could come at the expense of your business’s long-term health.
So, what do you do instead?
Start by analyzing the competition. Depending on your market, it may not be practical to study every competitor. This will be easier if you target local customers and have only three or four major competitors. If you sell to a global audience, it will probably be impossible to analyze them all.
But you should analyze as many as you can, at least until you have a clear idea of what you’re up against.
To do that, take note of:
- promises they make to customers
- pricing structure (like upgrades and levels of products)
- target market
- any claims they use to differentiate
Finally, ask yourself if they pass the “eye test”. That is, do they look and sound like experts? Do they do a good job of communicating their value?
What can you improve?
Once you have completed this process, you should know what is being offered and how much is being charged for it.
Armed with this information, you can then begin to assess your prices. Look at the level of benefits you are providing versus the price you’re charging.
How do they compare?
Even after this, it’s likely you still have more work to do if you want to raise your prices and justify charging more.
Yeah, But Can You Prove It?
It isn’t enough for us to have confidence that our offer is worth more. Our customers must have that same confidence. Simply making claims won’t convince anyone.
Instead, we must show people our offer has more value. This is where having a brand strategy pays off.
Most business owners are comfortable with the prices they have in place now. That’s because they know — without a doubt — the value customers receive is worth far more than what they pay.
So, why won’t these business owners charge more for their offer when they know the value warrants it?
It’s likely they have failed to create enough perceived value to justify the higher price.
For example, let’s assume you charge $1,000 for your service. Let’s also assume that after doing some research, you determine that it’s possible to raise prices by as much as 20%.
What was once worth $1,000 would now have a value of $1,200.
Many business owners would be nervous about raising prices this much. But again, this is because they are unable to justify the increase. They haven’t done anything to provide proof beyond a reasonable doubt that the service is now worth $1,200.
To them, the value delivered hasn’t changed, only the price has.
Many small business owners claim their prices are “fair” or “honest”. But this is a subjective statement. Claims like these are weak and inadequate when used to support a price increase.
When we raise prices based only on our opinion, we’re asking people to pay more for the same thing. Most people won’t pay more for the same level of value.
For this reason, it will almost always be difficult to raise prices if you use competitor pricing. Whether you can raise prices will be determined by the market itself, leaving you with no control.
Other than rising costs of living or materials, you have no other way to support a price increase. This leaves you locked into current profit margins.
To offset this issue, you will need to focus on creating more perceived value for your offer. Only then can you begin to differentiate your offer from others like it.
If you aren’t ready to do this, leave your prices where they are until you can.
How Premium Brands Charge Higher Prices
To justify any price increases, we must increase the perceived value of our offer. People must see a significant difference between it and competitors’ offers.
The key to a premium pricing strategy begins with differentiation. You must stand apart from your competitors and offer more value than they do.
People will pay more for something if they believe the value exceeds the price paid.
Many small businesses promote the features and benefits of their products and services. They may have a mission statement on their website or unique value proposition. But these aren’t enough to create differentiation.
Customers are evaluating their options and trying to decide if they can trust you to deliver.
Likewise, many of them aren’t qualified to make an educated buying decision. They don’t know enough about your industry to understand the differences in offers.
So, you must help them choose you.
Premium Brand Positioning
A premium brand is known for providing exceptional value and quality. Companies with this reputation can charge higher prices and face less resistance.
Here is a step-by-step process for positioning your business as a premium brand:
Step 1: Focus on Motivators
Premium products and services must have certain characteristics. Don’t assume you know how your customers define these traits. You can find out many things simply by asking them.
Keep in mind that people don’t always realize why they buy certain products or services. For example, if someone buys a luxury car, they may tell you they chose it for safety. But in reality, they may feel like it elevates their social status.
So, if we can’t always trust people tell us the real reason they buy something, how do we define quality and value?
This is where a little psychology comes to the rescue.
Studies show people will value something more if it aligns with their motivational profile. There are two categories of motivation: promotion-focused and prevention-focused.
Promotion-based people value offers that provide opportunity for success or gain. Those who are prevention-focused are more concerned with avoiding failure or loss.
This makes it easier to leverage buying motivators. Tying the benefits of your product or service to gain or loss will help your offer connect with more people.
Step 2: Show, Don’t Tell
As a business owner, you know more about what you do than your customers. After all, that’s what makes you the expert.
But people aren’t always qualified to choose the best product or service. They may not understand the specifications that make one option better than another.
This provides you with an opportunity to teach them. As you do this, you become an authority. Producing content that educates your audience helps them make better buying decisions. It also positions you as an expert in your industry.
Content like this doesn’t have to long. It could be a thirty-minute webinar, a blog post, or a how-to video on social media. It isn’t the length or frequency that always matters, it’s the quality and depth of the content.
Step 3: Customization and Tiers
To create more value for your product or service, you must deliver at the highest level.
Develop multiple offers with contrasting price points. Price your flagship product or service at an average or slightly above-average level. Then create another at a super-premium price. This will decrease the price pressure on the flagship product or service. Remember that the benefits of each offer much support its price.
As you create these offers, allow for customization. Providing add-ons, upgrades, or design options is a great incentive to buy. But be careful not to complicate the transaction if you do this.
Step 4: Deliver the premium “trifecta”.
Premium products and services deliver benefits on three levels — functional, technical, and emotional.
Functionality of a product or service refers to its ability to fulfill a basic need. For example, a car’s function is to move someone from one place to another.
The technical benefits relate to how much better a product or service is compared to others like it. For instance, a car may get better gas mileage or last longer than others in its category.
Finally, premium products and services deliver emotional benefits. Emotion is the primary motivator behind purchases, not logic. A luxury car may serve as a status symbol, which raises the owner’s self-esteem. This is a primary “reason to buy” leveraged by high-end automobile manufacturers.
Today, more people want an experience from the products and services they buy. Clubs, memberships, and upgrades are popular because they make people feel important.
What can you do to provide your customers with an unforgettable buying experience?
How to Tell Customers You’re Raising Prices
At some point, you will have to let people know prices are going up. You may worry about how they will react to the news. This is a legitimate concern. But there are ways to raise prices without making customers angry if you plan ahead.
First, think of how you would feel if a business you bought from with asked you to pay them more. What would frustrate you about an increase? What would seem like an acceptable reason for charging more?
Here are some price-increasing tips:
1. Don’t blindside them. Give your customers plenty of notice — months or even as much as a year or more, if possible.
2. Explain why. Give them solid reasons based on facts. Don’t insult their intelligence. Be honest, and if you can, talk with them in person.
3. Don’t apologize. Price increases are necessary at times. There are several reasons you may need to go up — operating costs, increase in materials, etc.
4. Be creative when developing your price structure. Explore ways to add fees. Deliver extra benefits, provide more value, create multiple price points, etc. These small fees add up.
5. The Grandfather Clause: Go up on new customers and leave prices unchanged for current ones. Or, set an expiration date on current prices with the understanding that they will go up for everyone at a future date.
Bonus Tip: Don’t raise prices too often. Set long-term revenue goals and work increases into your growth plan over time.
If you don’t meet resistance after raising prices, it could be a sign that you’re still undercharging. Reaching accurate price levels requires testing and feedback before finding the right balance.
It’s likely that you will lose some customers when you raise prices. Some people, whether they tell you or not, will resent the increase and go elsewhere.
While no one wants this to happen, the price increase should compensate for any losses. This is sometimes referred to as “addition by subtraction”.
Track the net revenue impact price increases have on your business. You can use this information to plan for the next one.
If you have any questions, please email me personally at firstname.lastname@example.org or call me at 800–590–8203.
Until next time,