8 min read
I always say the single number one decision that a business owner will make to increase profits is to focus on pricing. For a small business owner, this can be a tough decision to make and may come with some concerns for your business.
“If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.” – Warren Buffett
What Do You Fear?
Angry Customers? Losing customers to competitors? Going out of business? This article is for you. Many service businesses are afraid to increase prices on existing customers or to try to sell the same services to new customers at higher price points. While this fear is understandable, it is unfounded.
Do The Math
It's worth considering how a nominal increase in pricing can cause a material improvement in profits.
If you do the math, you’ll see that just a 10% increase in price can translate to a 100% increase in profits.
If you’re running a company that has $10MM in revenue with 10% profits and you increase your pricing by 10%, assuming no decrease in unit sales, you’d increase revenue to $11 million. You had $1 million in profits, now you have $2 million in profits. By increasing your pricing 10%, if you had a 10% profit, you're going to double because all that extra money goes right to the bottom line.
A lot of business owners say, "My price is set by the market. I can't just arbitrarily increase my prices 10%," and I say, "You're right. If your business is a commodity, that is 100% correct. You cannot increase your prices willy-nilly." However, if you are in the knowledge business and if you are a business that makes money on knowledge workers, skilled blue-collar or white-collar businesses - In order to increase your prices, what you have to do is demonstrate all your value.
What I find when I speak to CEOs is they are almost unanimous in their agreement that they are giving away value for which they are not getting paid. Most of them say it happens every single day. We had that problem. Why? Because service providers, in our case accountants, seek to please. They seek to get satisfaction from their work, which is shown in a happy client. Typically, service providers abhor sales. They don't like being sold and they don't like selling anything. They're engineers, they're IT support, they're accountants. They're knowledge workers.
It happens when a client asks for something, the service provider's first immediate reaction is, "Sure. We can do that," and just do it or give it away without any update to the original scope, especially if you're on a fixed fee.
Start By Considering Two Main Factors That Affect Pricing
1. Clearly Defined Scope Document
The best run companies have clearly defined scope in their contract and in the sales process. Before any work begins for the client, you must expressly state what is, and is not, included in scope and what the potential extra fees could be. By providing that in the contract upfront, you are making it clear that when a client asks for additional work, you can reply, "Yes, we can do that, but that's out of scope. Would you like me to submit a change order to take care of that for you?" The client is happy to pay it because they knew it going in.
Your scope document has to say what's included, what you get and what you don't get, and what things you may get charged extra for. Once you do that, the service providers of your organization are no longer sales reps having to overcome an objection. They are agents of change. They're happy to give you a change order because it fulfills their higher purpose, their self-actualization around service, and they want to serve you, and the more change orders that you agree to, the happier you'll be –– because you’ll be getting exactly what you need.
2. Complete Visibility Into Time Spent
The second magic bullet here is you must have complete visibility into what you and your staff are actually doing every single day for your clients, and have a system for surfacing changes in time spent. It's only when you actually see where the time goes that you understand the value that you're giving and you can monetize it.