Do your customers only buy from you because of the price? If the answer to that is yes, then we suggest you stop trading now, fold the tent, and go and find something else to do with your time and energy for the rest of your life. Unless, of course, you are using price intentionally and for a limited period to gain market share. Should that limited time have expired by now? Sure, the price has to be in the ballpark—and some ballparks are extremely narrow, but we really hope your customers are buying because your product or service is better, your supply is more secure, faster, and delivered free, and your credit terms are better (careful with that one), because you have a great relationship and you actually listen to your customers or, as we identified before, your customer is dual sourcing in case you or the other guy can’t supply for whatever reason.
Pricing Right
Pricing is in the STOP section of this book—as opposed to Change section—because we have found that most businesses in your position need to stop leaving money on the table and thus release some money into their business. When did you last raise your prices?
Let us ask again. When did you last raise your prices and make the increase stick across your entire customer base? And what’s your industry doing? Iron ore companies have industry wide annual price fixing with their customers based on whatever is negotiated freshly each year rather than simply last year’s price plus a percentage increase. For most other industries, it is unfortunately left to individual businesses who will otherwise get themselves into enormous legal trouble if they collude on this matter.
Some businesses can get help. Many professional services organizations publish annual surveys of fees charged—are yours above or below the survey average? Do you write fixed term and fixed price contracts with your customers—or do you add in a little clause allowing for an annual review in line with/larger than inflation and/or interest rates? Or for international trade, in line with/larger than exchange rate variations? And if you do include annual reviews, have you been implementing them?
Any pricing for any customer has to be a win–win. If the price is hurting you more than it’s hurting the customer, then you need to sit around the table with the cards face up and negotiate a better deal. Or simply announce a price rise—particularly if, in the doubling your margin section, the calculations show you are hugely into negative territory. If you know your customers—please tell us you know your customers—you’ll know how to implement a price rise with each in turn.
If you are a restaurant business, a change of menu might be a good time for a price review. Some other businesses might establish a practice of annual price changes which they might use as a sales tool—buy now before the increase and so forth. We have a local coffee shop which increases its prices annually just as a big local tennis tournament arrives, benefitting from higher volumes and higher margins during the competition and then leaving the new price in place for the next 51 weeks.
Unless you have some commissioned sales people, every penny of a price rise flows to your bottom line—provided always that you keep the customer and the customer keeps paying.
Our guess is that your pricing has been built up higgledy-piggledy over time, and a comprehensive review is long overdue. In fact we implore you to look at every aspect of pricing triggered by our comments in the few short paragraphs above. However, this might not yield the sparkling total you would like to see at the end of the rainbow, so maybe there are still other factors affecting cash.
Pause: Did you make notes of things in the Action This Today section in the back of this book? If not, please take this opportunity to review the prior pages to identify again any thoughts and ideas you want to follow up on.