Sales down? Margins squeezed? Worried about the recession?
If so, here is a top tip: put your prices up!
I often run regular sales workshops with early stage companies and invariably find that they are not charging enough for their products or services. They feel that in a competitive market they should be forever shaving their margins and lowering their prices.
The reality is that if you are perceived as cheap, people will worry about buying from you. Most people prefer paying a proper price so long as they feel that they are getting good quality and value for money. These are the customers you should be targeting, not the ones who seem to be forever complaining about your prices.
This is particularly true with service businesses, but it also applies to products, or at least products of any complexity, where quality is an issue. The only place where you are really forced into a price war is ‘commodity’ products, where what you make is indistinguishable from that of your rivals – petrol, for example.
Most products have a service element attached to them. Customers want them delivered on time. They also want to receive prompt, friendly and effective service when there is a problem. These elements cost money, and should always be factored into your price, which then has to be explained to the customer.
Software is a good example of a mixture of both product and service. It may look like a product, all nicely packaged in a box, but usually requires support, which can be very expensive.
Sadly, many software companies don’t understand this and price their products far too low, essentially by looking at the cost of production, rather than at the costs of development or, more relevant still, measuring the benefits the customers will eventually receive.
A good example of how to get pricing right is Broadbean, a company run by Dan McGuire. He had worked for a couple of years in the recruitment industry and saw a gap in the market with the arrival of internet job-finding sites such as Monster.com.
Recruitment agencies began to put their vacancies on these sites but the process was time-consuming and tedious. Dan’s plan was to automate the process of posting job vacancies using a clever piece of software.
He suspected that the recruitment industry was tight on margins, so he priced his software very low, starting at around £100 a month. He spent a long time in the doldrums, not even taking a salary; not only were recruitment agencies loathe to spend even £100, he also had a number of competitors, all offering what appeared to be a similar service (though they were, in fact, inferior) for £10 a month less. He knew a price war would bankrupt his company, so he took a radical step. He tripled the price of his software.
This had an immediate effect; potential customers were initially very sceptical, but at least he had started a dialogue with them, discussing how he could possibly justify charging so much.
Dan believed in his product and could show that not only did his software save considerable manual labour for the agencies; it also quickly paid for itself many times over, thus providing excellent value for money.
Customers soon understood this, and became prepared to pay for it.
It is much easier to find ways of improving your products or services than it is to reduce your costs. Look at the occasions when your existing customers were particularly satisfied and did not quibble about your costs. Invariably, it was because you provided excellent service. All you need to do is to provide these elements and more to all your customers, all of the time.
If you do, they will usually pay a sensible price. Usually. But sometimes you find yourself dealing with an experienced negotiator, such as a purchasing director, who is very effective at asking for discounts.
The message here is ‘Don’t panic!’ I recently moderated a conference for purchasing directors, and they all said the same thing: it is never just about price; what they are really looking for is value for money. If you can honestly justify your price on the basis of good quality, delivery and customer service, they are prepared to listen.
The idea for putting his price up certainly worked for Dan McGuire. He now has over 40 staff and was recently awarded ‘Young Entrepreneur of the Year’ by Real Business magazine. He has plans to open up on the West Coast of America and in the Far East so he can provide 24/7 coverage for his international customers. This coverage is a very valuable extra benefit, which I am sure will be reassuringly expensive.
Dan McGuire is widely regarded as one of the UK’s top young entrepreneurs, with a string of prestigious awards to his name. His first company, Broadbean Technology, was sold to DMGT in October 2008 and he is the founder of social enterprise The Two Hour Initiative which brings entrepreneurs together to promote business in schools.
This article is a chapter from ‘This Is How Yoodoo It’ – a collection of Financial Times columns written by Mike Southon. You can buy this book in hard copy and in Kindle version here: http://tinyurl.com/YoodooBook
