Is it time to raise your prices?
A few years ago things were hectic at work and I had no time to cut the lawn. To avoid a homeowner’s association ‘nasty-gram,’ we decided to hire a landscaper.
Brian was referred by a neighbor and offered us a great deal. We gave him the go ahead and for the first several months things went well.
After a while, things changed. At first it was a extra day between cuts, then a few extra days. Eventually, we missed Brian for two weeks.
When he resurfaced, I asked what happened. Brian said he had too many accounts. His customers referred so much business that he couldn’t get to every lawn. So, he fired one quarter of his accounts to make the business manageable.
Sound familiar? Small business owners often take on large amounts of work to get through slow times. But, sometimes the slow down doesn’t come. So they operate in a constant state of overwhelm until they can’t take it anymore and eventually cut back. Most, like Brian, just terminate or ignore loyal customers.
But, isn’t that just throwing money down the drain?
After all, you’ve spent time and money cultivating customer relationships and building trust. Is there a way to maintain income and reduce work load?
Well, instead of firing customers indiscriminately, Brian could have raised his prices. Some customers will leave. But, those customers weren’t focused on Brian's good work; they only cared about the price.
Customers whose primary concern is price will always leave when a better deal comes along. Its just a matter of time. As a small business owner, its difficult to compete on price alone. There is always someone with lower costs (or who doesn’t know his costs) who will undercut your prices.
Instead, you’re better off finding out now who your price sensitive customers are, so you can focus your efforts on the more valuable longer lasting customer relationships. A reasonable price increase does that by causing the price-focused customers to complain or leave.
About 15% of people shop solely on price. So, you’re unlikely to lose a lot of customers. Also, as a bonus, you won’t lose all of the revenue from the departing customers. Your price increase to the other 85% will make up some, most or all of the difference.
If that didn’t work, Brian could've analyzed his accounts and adjusted pricing based on their "desirability" or profitability.
The better more profitable accounts would have a smaller price increase and the less desirable lower profit accounts a larger increase. That large increase would make it more likely that less desirable accounts would fire Brian. But, if they didn’t fire him, at least he’d increase their profitability. And the increase on the more profitable jobs would again make up revenue from lost accounts.
Finally, if those didn't work, Brian could've referred accounts to a competitor in exchange for a referral fee, thereby taking care of the customer and making up some lost revenue.
I must admit, I didn’t tell any of this to Brian.
Things went well again, until Brian went missing once more. Upon reemerging, he fired us and I began cutting the lawn myself. I needed the exercise!