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Raising Prices The Right Way

AGIC
Oct 15, 2019 blog 0 Comment

“If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the prices by 10 percent, then you’ve got a terrible business.”  – Warren Buffett

What do you fear…

  • Angry Customers?
  • Losing customers to competitors?

  • Going out of business?

It’s worth considering how a nominal increase in pricing can cause a material improvement in profits.

Start by considering two main factors that affect pricing…

CLEARLY DEFINED SCOPE DOCUMENT

The best-run companies have clearly defined scope in their contract and the sales process. Before any work begins for the client, you must expressly state what is, and is not, included in the scope and what the potential extra fees could be.

When a client asks for additional work, you can reply, “Yes, we can do that, but that’s out of scope. Would you like me to submit a change order to take care of that for you?” The client is happy to pay it because they knew it going in.

Your scope document has to say what’s included, what you get and what you don’t get, and what things you may get charged extra for. Once you do that, the service providers of your organization are no longer sales reps having to overcome an objection. They are agents of change.

COMPLETE VISIBILITY INTO TIME SPENT

The second magic bullet here is you must have complete visibility into what you and your staff are doing. It’s only when you see where the time goes that you understand the value that you’re giving and you can monetize it.

How do you do that?

Here’s an example: An IT company continues to get calls from certain clients, and those calls take an extra 15 or 20 minutes per day.

If your employees are doing their best to approximate how much time they spend a day. Then what you measure is how the actual time differs from what you budgeted for. What you thought was going to be when you created the proposal?

Then make a decision to either go back and renegotiate with your clients based on what they’re getting, or terminate those old clients and replace them with higher-margin new clients.

You will be able to see the value and you can explain that value to the client. So they are willing to accept the increase, based upon added value.

“…A company exists only as long as it earns a profit and it can only do that if it delivers a quality product or service at the right price. This means that the key to any conversation about raising the price is to emphasize that such an increase will ensure product quality.”
– The Balance

If they’re not willing to pay for it, you can stop doing it. And then in effect, that’s not the same as increasing your prices. But it does have the same kind of material impact on your profits.

If you’re giving away services that you didn’t think you were going to be giving away, then you either get people to pay for it or stop doing it. This is a well-accepted process because it’s putting the decision in the hands of the client.

Game of NegotiationPrevious post
Break Even Analysis: Improving Your Bottom LineNext post

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