Let’s do something really, really stupid.
Let’s avoid increasing your prices. Let’s actually decrease them.
By a whole 50%.
So instead of earning $50 per hour, you actually start earning a measly $25.Then just for good measure, let’s reduce your prices by another 50% to $12.50 an hour.
And now let’s do some calculations, shall we?
When you worked at $50 per hour, you earned enough each month to afford a pretty decent lifestyle (even though you’re kinda slogging out that forty-fifty hour week)
But notice what happens when you drop your prices in half
Now you’ve got to work a hundred-hour week, just to be where you were earlier.
If you drop your prices by another 50%, you’ve now got to work a two-hundred-hour week–just to maintain your earlier lifestyle.
And of course, you can’t see the point of this article, right?
Oui, as you’d expect, there is a point. A very valid point. In fact it’s a case: A case for increasing your prices.
But let’s continue to do something stupid: Let’s wallow in the low-price scenario for a while, and see the consequences of lower pricing.
We already know if you reduce your prices by just 50%, you now have to work twice as hard. But twice as hard, means you’re twice-as -tired. More tired, means you’re slogging your you-know-what off, just to stay in place.
Or if you sell products instead of services, you’ve got to reduce the quality of your ingredients. You’ve got to put in cheaper, el crappo ingredients.
And the repercussions are worse than just tiredness. Or sub-standard products. The biggest repercussion is the loss in value that you bring to the customer.
Because stop for a second, and think about it.
Think about what your customer really wants:
Let’s assume you make bread. As in Pita bread. Like Danny’s Pita Bread that you’ll find in a local supermarket in New Zealand. (And yes, I’m a fan of their bread)
You’ll find that while there’s a fair bit of ‘discount bread’ around, Danny’s Pita is not available at a discount.
The logic is simple. To create tasty bread, you’ve got to use higher quality ingredients.
And if you don’t want to reduce your profits, and are already running a cost-effective business, then as a manufacturer, you have to pay for better-quality ingredients.
Ergo: The bread costs more. But tastes better. Or would you prefer cheaper pita bread that tastes like cardboard?
It’s no different if you sell services instead of products.
Let’s assume you’re assigned to create a website for a customer.
Does that customer want you to charge $2000 for the website? Or $5000? Sounds like a silly question, but it’s not. The answer depends on the value you bring. And how much you educate the customer on that value.
So if you charge $2000, and the website enables the customer to bring in profits of $5000, then you’re doing fine. But what if you charged $5000, and the customer could bring in profits of $20,000?
Which option would the customer choose? The $2000 fee? Or the $5000 fee?
Again, silly question.
A question that kabooms you right back to lower prices.
When you charge lower prices, you work twice as hard. That we know for a fact.
But you also have no time to learn. You certainly don’t have the money to spend on the books, superior equipment, better advice etc.
And you know as well as I do, that the most effective tools and systems are often the most expensive.
So you plod on.
You do only what’s expected from you. You overwork your frazzled brain. You create yucky, sub-standard products.
And the spiral whizzes downwards.
You learn less. You bring less value to customers. You earn less.
So what’s the key to earning more?
The key is in understanding that your customer ain’t interested in your fee. Your customer is only interested in value. As long as you can demonstrate the value, your customer is always going to choose you over the competition.
What’s really important is that you educate your customer on the difference in value (Value is not always perceptible).
But won’t increasing prices, reduce profits?
Won’t you drive away your customers in hordes? Let’s take a few examples and see, shall we?
If you go to the supermarket, and the price of your brand of bread at $3, has gone up by 10% to $3.30, will you scream in angst?
If you go to a workshop and last year’s price was $500, and this year’s price is $550–will you not go?
If you need roofing, and the better roofing costs 10% more, but lasts longer, will you buy the cheaper roof?
Of course, there are price-conscious customers
And for every price-conscious customer, there is a value-driven customer.
So yes, you’ll lose the customers who’re on a tight budget. But simultaneously, the number of value-driven customers won’t vamoose to your competition’s business.
This of course brings us to one of the lamest excuses for increasing prices. The reason why most businesses say they don’t like to increase their prices, is because they don’t want to over-charge customers.
Well, if you’re so afraid you’re overcharging, why not undercharge? Why not reduce your prices by 50% instead? Double or treble your workload instead. Learn less. Earn less. Bring less value. And go out of business.
Hmmm…raising prices doesn’t look so stupid after all, does it?
Next Step: Want to learn more about pricing? Find the entire pricing strategy series in text, audio with cartoons!
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