Increasing your prices is one of the easiest ways to increase your profit margins. You have to understand the price elasticity of your market and how your customers will respond.
The truth is that price isn’t as objective as many people think. After reading the phenomenal book, Priceless – The Myth of Fair Value, my eyes were opened to how the billion-dollar brands approach pricing and how people aren’t as price-conscious as you would think.
Price Intelligently has said it beautifully. Price is the most effective lever to maximize profit.
These are some things you must understand to effectively raise your prices.
Data Source: McKinsey & Co.
Value Influences Price
Value is one of my favorite subjects to talk about. Value is major.
Let’s say you have a custom made guitar for sale. You approach a guitarist and ask them how much he’s willing to pay for it. He looks it over and notices the great headstock, pickups, and bridge (all guitar terms) and tells you that he’d pay you $1,200 for it.
Next, you take it to a lady that loves to hear guitar musicians but doesn’t actually play. She looks at it and thinks it looks cool and would love to hang it on her wall and offers you $50.
How is it that two people could pay completely different prices for the exact same product?
That’s because they both attributed two different levels of value to the guitar.
- The guitarist saw tons value in the guitar.
- The value was worth it to him.
- He had the money to measure his value.
If any one of those three factors we missing, there would be no sell.
Here’s the woman’s situation.
- She didn’t see much value in the guitar.
- The value was worth it to her.
- She had the money to measure her value.
The first important thing is that you must find customers who see the highest level of value in your product or service. Remember, we are talking about profit margins here.
The second important thing is that your customers must be willing to measure the value they see in your product or service with money or a dollar value.
Third, your customers must have the money to be able to fulfill their measure of value. There are many people that see the value in things but don’t have the money to make the sale happen.
If anyone of these three factors is missing, no sale happens which doesn’t help you much.
Perception Determines Price
Perception is everything. Remember that the first step in making the sale at a higher price is that the person must first see the value.
Well, there is no one exact price to determine the value of a product. Think about an auction, it shows us that the winner of the bidding obviously sees more value in that particular item more than others bidding (Or is caught up in the adrenaline of being macho).
You must make sure that build your product and present your product in a way that intensifies peoples perception of it.
Here are some ways that you can intensify peoples perception of your product or service:
- Design – How can you improve how your or service is designed?
- Packaging – In what ways could you better package your goods to increase perception?
- Function – Can you improve the functionality of it that demonstrates added benefits and ease?
- Presentation – How can you present it better (silver platter) to instantly justify value?
- Visible Quality – Are there some things you can do to the physicality of the good to add value?
You can apply these principles to different channels of your business. You ask these questions about your website, product, advertising, customer service process, and much more.
These are some things to think about but can kick your marketing and prices to the next level.
Get Paid What You Deserve
You deserve what you are worth and the value you provide.
I Will Teach You to Be Rich author Ramit Sethi often endorses negotiating salary and getting a raise. The same principle applies to business owners.
It’s so critical to understand this.
Many times we undervalue ourselves and how much value we bring to the marketplace.
I see so many astounding people working for much less than they’re worth simply because they simply don’t realize how valuable they are.
You understanding how valuable you are can have a significant impact on the money you make.
Remember, money is a measure of value.
The more value you see in yourself, product, or services, the better you can communicate that value to others.
The best way to understand your product or services value is to consider how much better you are than the competition and how you offer something unique to the market.
If your product or service does not already meet this criterion then you should consider how to make it better than your competitor and offer something unique to the market. That makes marketing a higher price and communicating added value much easier.
Provide an Experience
Your customers want to be WOW’ed. They want to brag about you to their friends and talk about how they were great enough to discover you.
You just have to give them a reason to.
People don’t just want a product or service, they want what it will accomplish for them.
If you could take them on a journey while meeting that desire, then you have struck gold.
That’s why movies have been and forever will be in demand. Because they not only entertain people, but provide them with an emotional experience, a journey.
Have you ever sometimes caught yourself in a movie theater reacting just like you are ‘in’ the picture? They did a great job at providing you with an experience.
Here are some ways to provide an experience:
- Customer Service
- Over Delivering
- Intensifying Experience Through Surrounding (Think concert or Starbucks environments)
When you can provide an experience that exceeds your competitors, you build brand equity in the mind of your customers. And when the customer needs that product or service again, guess who they’re likely calling?
Add Value While Minimizing Cost
While you’re adding all of this value to your product or service. Be sure to make sure that the rise in cost does not meet or exceed the value that it provides. If the cost that you add to justify the increase is more than the new price then it makes no sense.
Make sure you are adding more value than it cost so that you can increase your margins along with the price.
Profit Margins are Critical
It’s easy to get caught up increasing price and revenue. It’s also just as important to increase your margins. That way you can make more money with the same amount of current business.
1) Increasing your profit margins by 10%
2) Increasing your price by 10%
You would have then more than doubled your profits.
What would happen if you optimized those further and then got even more customers?
Your business would skyrocket!
It’s a numbers gain that harnesses the power of compounding. Ask any billionaire and they’ll tell you, compounding is their best friend.
Warren Buffett attributes his wealth to compounding.
Increasing your margins along with price allows you to compound your income and see breakthrough results.
Upsell, Upsell, Upsell
Upselling is another form of price increases but is highly underused. Successful brands successfully leverages upselling and integrating it into their sales strategies.
JetBlue projected to make $190 million in additional income in 2014 through upselling.
While I no longer care much about there food, McDonald’s has made billions through upselling. Would you like a large fry with that?
A beauty or upselling and cross selling that is often overlooked is that you likely didn’t have to pay to get the sell of the cross or upsell. That means that those products or services have higher profit margins since acquisition cost were likely taken care of when they purchased the first product.
Upselling is a subject within itself that can hardly be exhausted. It can be another form of price increase that can, according to Neil Patel, double your revenue.
Charge For Value Instead of Time
Charging for time or hourly is a common practice in industries like consulting. Sometimes it is the most effective pricing strategy. In some cases it may be more profitable to charge for the project or value instead of time.
This can be a double edged sword. Since sometimes you can have a price that was agreed upon and you do more work than you initially thought it would take. But sometimes you could finish the work quickly a get paid a premium for a minimal amount of work.
This same “bundling” strategy applies to products just as much as it would to services. You could bundle products or services to justify and command a higher price. This works especially well when you can bundle things that can’t be purchased separately with your product or services. This gives you more control to raise prices at your discretion.
Create Secondary Products
Also, sometimes you can break up your product and require people to buy other products from you. This is called creating secondary products.
Secondary products are products that rely on a primary product to justify their value/use.
They are very popular and many people don’t even notice them.
Think about digital camera manufacturers. They often sell lens’ and battery packs separately, creating for them the opportunity to keep selling to the same customer repeatedly.
In your case you want to consider making something that is already included in your primary product a secondary product.
Microsoft does this with the Xbox. They usually sell the same with one or sometimes no controllers. Then forcing the customer to by the remote from them or the secondary market. They could very well include two controllers in the standard package but they don’t.
Quicksprout published a great piece on upselling and cross selling.
Price For Scalability
When increasing your prices, you want to make sure that you are also optimizing them for scalability. This is very relevant to price elasticity.
Price elasticity is –
The higher you make your price, it is likely that you will serve less people.
You want to find the sweet spot that allows you to maximize price without giving up too much of the market.
It’s the process of finding that threshold where you can demand the highest price while still serving the highest amount of people.
Many people often go to the extremes on price. Two extremes would be:
Walmart sells products at an extremely low price. Gucci sells products that are thousands of dollars.
You don’t have to take Gucci or Walmart’s approach. Rather you can take Starbucks or Apple’s approach. Where you charge a premium in proportion to your competitors but still serve a ton of people.
Apple and Starbucks are perfect examples of finding the sweet spot of having the highest price possible and serving the most amount of people.
You can also be Walmart or Gucci and make great profits (they both do).
I personally love Apple’s and Starbucks pricing model.
Kissmetrics put together a great piece on how to effectively implement scalable sales models.
You should check out the book, Priceless: The Myth of Fair Value (And How to Take Advantage of It) by William Poundstone. He goes into detail on how price is relative and how apart from being compared to something else, price is extremely elastic.
There are so many different things you can do to increase your prices and make more money. It can be scary raising your prices, being unsure of the effect it will have on your business. I encourage you to try the things mentioned anyway. I’ve used many of them with great success and I’m so glad that I have (so is my accountant).
Use these strategies effectively and watch the floodgates pour in!
What are some price raising hacks that you have used successfully?