When to Raise Prices, or ‘The Perfect Number of Beers’. In Blackboard Fridays Episode 85, Jacob talks about Sales and Growth Planning. Need this implemented into your business? Talk to the international business advisor who can do exactly that – Contact Jacob, Learn More, or Subscribe for Updates.
It’s hard to know which I love more – money or beer? So it was inevitable that I would combine these two great passions in a tale about raising your prices, and as a result dramatically improving your profit and cash flow.
Chances are, your prices are too low. You – and your team – are worth more than your clients are paying you. Am I wrong?
So what’s holding you back from charging more? This week, I will walk you through the specific experience that 5 different clients of mine have had with raising their prices – all successfully, sometimes surprisingly so. I’ll even share the process I recommend that has clients saying “Thank You” when you increase your fees.
And what does that have to do with the perfect number of beers at a party? You’ll have to watch this week’s episode here to find out.
Who is Jacob Aldridge, Business Coach?
“The smart and quirky advisor who gets sh!t done in business.” Back independent since 2019.
Since April 2006, I’ve been an international business advisor providing bespoke solutions for privately-owned businesses with 12-96 employees.
At this stage you have proven your business model, but you’re struggling to turn aspirations into day-to-day reality. You are still responsible for all 28 areas of your business, but you don’t have the time or budget to hire 28 different experts.
You need 1 person you can trust who can show you how everything in your business is connected, and which areas to prioritise first.
I’m often asked in Blackboard Fridays to share some more case studies, more examples of real businesses really using some of the tools, tactics, and strategies that we share to create a better business for them. So today I’m gonna share five different conversations linked to pricing. Particularly, when and how to raise your prices.
I want to start with a question for you, a question about one of my favorite topics, beer. I want you to imagine that you’ve hosted a cracker party. One of those real all-night ragers where everybody’s drinking bottled beer. Now, that might be Natty Light, or XXXX Gold, or the craft beer of your choice. It could even be my personal favorite, the Newcastle Brown Ale, a meal in glass. You wake up the next morning a little bit dusty, glad to see that the guests have finally left. You wander your way into the kitchen. You open up the fridge, and you want to see how many beers are left.
So my question for you is this. The morning after an excellent party, what is the perfect number of beers that you will find in the fridge? Now, most people think that zero is the perfect number. If we had no beers left, then that’s a fantastic sign, perfect number. The problem with zero beers left is that you’re not sure how many people wanted more beer, but weren’t able to drink it because you’d run out.
The perfect number of beers is one. If there’s one beer left, then that means everybody had exactly the amount they needed. And you didn’t overprovide or over-cater for that party. Plus, you’ve got a cold beer for your hot shower the morning after. Hangover cures, all part of Blackboard Fridays.
So, what the heck does having one beer left have to do with pricing? Well, it comes back to your conversion rate. If you’re converting every single client that you sell to, then almost certainly your prices are too low. Just like people miss out on beers if you run out of beers, your business is missing out on revenue and extra revenue that would go straight to your bottom line, so profit, because you’re not priced appropriately.
You need to focus on your business. The value that you deliver to your customers, absolutely, but make sure that you’re pricing yourself accordingly. Here’s how it fits into that capacity engine framework that I love to talk about.
Let’s say this is your business today. Your team are running at about 100% capacity, They’re pretty full. And you’re a great salesperson, so you’re selling an awful lot of customers. Let’s say for the sake of doing some numbers that you’ve 100 customers at $100 a month each. So you’re bringing in $10,000, that’s your capacity. That’s the size of your capacity engine.
You can make that per day, you can make that per month, adjusted accordingly for your business. Your team’s running at 100%. Now, I might jokingly in a coaching situation. You say, well, what happens if you put your prices up by 50%? And you’d probably tell me that you’d lose all of your clients. You’d have a bigger business, but you wouldn’t actually be generating any revenue. So that’s not the solution.
But let’s say you put your prices up by just 10% and lost 9% of your clients. What would that situation look like? Well, now you’d had 91 clients instead of 100 at $110 each per month instead $100 per month. Now, that adds up to $10,010. Okay, your revenue’s gonna up by 10 bucks, hardly something to write home about. Until you remember that your team have the capacity to service 100 clients.
So in actual fact your capacity has gone up. It’s gone up by 10% to $11,000. Without having to hire any more people, without having to incur any more costs in your business, you’ve managed to increase the capacity. And because you’re a great salesperson, even if you don’t convert every single person anymore you’ve still got the revenue coming in to make sure that that engine gets full pretty quickly. You know right now that you need to put up prices.
Let’s talk about some real experiences of doing it. And at this point in the economic cycle I think you really are in a position to be putting up your prices on at least an annual basis. First client example I want to use is a client of mine in the UK. Now, they’ve just gone down the raising prices for new clients. They haven’t yet decided to put up prices for their existing ongoing clients. They feel that’s a conversation too far. But with the conversion rates they’re achieving they’ve put their prices up per product from 475 pounds to 525 pounds.
They were selling 100%, you know what they’re selling at now, 100%. Their conversion rate hasn’t changed. That tells me they probably could have gone to 550 or 575 pounds. All of that difference goes straight to the bottom line, and it’s not taking them any more time to bring it in. Let’s say, however, you do want to raise prices for your existing clients.
We do need to do this from time to time. A lovely process that I’ve run with a number of businesses that actually gets your clients to thank you for putting prices up. That’s right, you raise prices, you cost them more, and their response is thank you. The trick is to do it this way. You send out a letter, or an email, make a phone call, depends on the volume of clients that you’re working with. And you let them know, you say we’re raising our prices, no need to justify why. We’re raising our prices from say the first of September 2018.
However, to value your loyalty, and as our thanks to you for being a great client all this time we’re going to hold off increasing prices for existing clients until the first of January 2019. What you’ve actually done is send them a letter saying, hey, from the first of January your prices are coming up. But by positioning it that they’re waiting longer than new clients who will get that price rise in September you’re actually demonstrating that you value them.
You’re giving them something and that’s why they say thanks. It’s a wonderful way to have what can otherwise be seen as an adversarial relationship. When you go to put prices up you need to be thinking sometimes about what happens if the clients stay.
I’ve seen some businesses go down a route with clients they don’t want, of just trying to put the prices up to the point where those clients leave. If you’ve got a situation like that ask yourself, what is the amount of dollars, the revenue I can bring in from that client, that will actually energize me and my team to do that work?
Money is energy, the client relationship is energy. If you’ve got painful clients, is there a dollar figure where they stop being painful? Had a great experience with an accounting business some years ago where they had identified a pool of 15 clients that were using a particular service of theirs that was just really painful, and when we did the numbers, completely unprofitable. They sent out a letter to the clients letting them know that from next financial year the prices had to go up on that service.
They actually tripled their prices. Deep down they were kind of hoping that all 15 of those clients would say thanks, but no thanks, we’ll go somewhere else, not a problem with that. Instead, all 15 clients said we’re quite happy with that. We’re still getting value at three times the price, so we’re staying.
Thankfully, the accounting business was happy to bring in three times the revenue because that was now a profitable service. If they’d just doubled it they still would have been unhappy, the client still would have stayed, and nobody would have one. Sometimes you do just want to get rid of your clients.
Another business that I worked with sacked half of their clients in one fell swoop. We again did a customer analysis. We realized that there was a specific service they were delivering. By number, half of their clients were using it. Every single one of those was unprofitable. You may have heard of the 80-20 rule, 80% of your output comes from 20% of your actions.
This business ran 90-10, 90% of their profit came from 10% of their clients, and was being dragged down by 50% of their clients that were unprofitable. They wrapped them in love, sent them on away. Found a competitor in a nearby suburb. Did a deal to just hand over all of those clients. Didn’t even try and sell them, they just got rid of them.
What that did in terms of their capacity engine was grew it enormously. Suddenly, all of these staff that were delivering a low-value no margin product were able to deliver the high value, that 10%. So the average revenue per team member went up through the roof, and everyone was energized to go out and sell.
One more example around pricing and packaging that I’ve saved for last because I do particularly like it. And this is accounting for FAF. FAF stands for the let’s go with FAF around factor. Insert the F word of your choice. This is a wonderful consumer-facing client of mine who had a very complex pricing process and spreadsheet that they would go through to work out the exact product in the construction industry for their clients.
They would get the pricing very, very precise. The very last field that they had in that spreadsheet was called FAF. This was designed to take into account how difficult the client was, you’ve all been there. You’ve all worked with clients that even though they’re buying the same service as other clients, you know it’s gonna take you more time. It’s gonna cost you more in mental effort, and exertion, and their complaints, their queries, all of that stuff. If you’ve been in business for any length of time you can pretty much gauge with gut feeling the sales process when you’re getting one of those clients.
Now, you could say no, or you could account for FAF. So these salespeople would put in 20%, 30%, 50%, 80% in one case. They knew that client was gonna be extraordinarily difficult. They ramped up the price such that if they won that client they would be energized.
As often as not, the clients would actually buy because so many of their competitors wouldn’t even price it, wouldn’t even come back to them with a quote, because they knew they were a difficult client. So by accounting for FAF the revenue came in. They were able to give a bit of extra cash to the guys who are out on-site dealing with some of the pain day to day. And the revenue and profit came into the business, even though those clients took a lot more time.
Getting your pricing right is critical. Too many business owners because they love their customers, they love what they’re doing, keep their prices artificially low. That does not do a service to your business, does not do a service to you. Certainly doesn’t help you pay your team what they’re worth.
At the end of the day all of those things have a negative impact on your customers. Price your product or service appropriately. Work with the customers who will value that. Understand that there is more to the relationship with your business than just your price. If you do that you’ll be able to work more easily, you will have more profit, and you’ll have a heck of a lot more time for those raging beer parties that I love to talk about.
Want to learn more about how this can apply to your business? It costs nothing to chat:
- Email me firstname.lastname@example.org (I read them all)
- Call, Text, or WhatsApp me +61 427 151 181
- Or just Subscribe https://jacobaldridge.com/about/subscribe-to-jacob-aldridge-com/ to stay in touch