While deciding on fixing the prices of your products and services (which we started to discuss in the last post)…
…it’s quite possible you fall into a common error most businesses fall into when trying to beat their competitors and win over the hearts of their customers…
The Price-Cutting Trap
So many businesses fall into the trap of always trying to be cheaper than their competitors.
You see adverts all the time that say, “best prices anywhere”, or, “the cheapest price you can get anywhere ever”, or, “if you can find this cheaper somewhere else, we’ll pay you the difference plus 10%”, or, “plus 20%”.
This is a big marketing mistake.
Never get into a discussion of which company – you or your competitor – has the lowest prices.
Never get into a price war.
Yes. Price is certainly one factor your customers might consider when doing business with you.
But price is not the only factor.
In fact, price is one of the least important factors determining whether someone does business with you or not.
You want clients and customers who are primarily interested in quality, not price.
So instead of focusing on how much you can afford to cut your price, focus instead on providing increased value to your customers.
A study shows that a 1 percent cut in prices costs the average company 8 percent in profits. This means that a 10 percent price cut wipes out 80 percent of the profit.
This number varies depending on the industry you’re in, but the point is that even a minimal price cut is often financially devastating.
If your profit margin is 20 percent, a 10 percent price cut means you’ve just lost half your profit – half your income.
But most businesses are operating on less than a 20 percent profit margin because they are in a constant price war with their competitors.
Now let’s look at what happens when you raise your prices 10 percent.
So, if your profit margin was 20 percent, it’s now 30 percent.
You have just increased your income by 50 percent with a 10 percent price increase that will hardly be noticed by your clients and customers.
Reading this now, you should consider raising your prices 10 percent right away.
This is the fastest, easiest way to improve the profitability of your business.
With 10 percent price increase, if you lost one-third of your customers, you would be just as profitable as you were before.
Most likely, you won’t lose any customers.
In fact, increase your prices another 10 percent in six months, and see if you lose any customers.
If you’re a well-run business that provides excellent quality, service, and value, you’ll be fine.
So now, you’ve doubled your profits in six months adding a single new customer.
What People Actually Want From You and Your Business
You should never allow a business conversation with your customers to focus on the issue of price.
You don’t want to do business with the bargain hunters and price shoppers.
They will drag you down.
You are almost certain to lose money by servicing this kind of clients and customers.
If someone comes to you and says, “I can get the same thing down the street for 10 or 20 percent less”, your answer should be, “and then why are you here?”
Of course, the reason they are standing in front of you is that they really can’t get the same thing down the street for 20 percent less.
They know you’re the best.
They want to do business with you.
But they are scamming you.
They are trying to frighten you into cutting your prices.
If people were really only interested in price, everyone would be driving the cheapest cars, wearing the cheapest clothes, eating the cheapest food, taking the cheapest drinks, and living in the cheapest houses.
When you think about it, the truth is, most people don’t want the cheapest of anything.
Do you want the cheapest surgeon operating on you?
Do you want to fly on the plane that hires the cheapest pilots?
Do you want the cheapest lawyer handling your case?
Do you want the cheapest teachers teaching your children?
Do you want to stay in the cheapest motel or hotel?
Or, you want to watch the cheapest TV?
Do you want the cheapest furniture in your home?
Or, you want the cheapest carpeting?
Do you want your house painted with the cheapest paint?
Do you want the cheapest roof?
How about the cheapest electrical work and the cheapest plumbing you can find?
Do you actually want the cheapest haircut?
All answers are a capital “NO”.
People want quality.
People want great service.
People want convenience, prestige, and a great customer experience.
Most people understand that they must pay a premium for these things.
People also want a trusted relationship with those they do business with.
But here’s another problem with getting caught in a price contest with your competitors.
If you keep cutting prices, soon you won’t have enough profit to be able to provide the products and services your customers want and expect.
You will find you have no choice but to start cutting corners and shaving your costs or you’ll go out of business.
Soon your customers will start noticing the poor products or services and will leave anyway…which is want you’ve been avoiding.
Getting caught up in a price-cutting contest with your competitors is one of the surest roads to business failure and bankruptcy.
Your customers won’t appreciate your low prices, but they will blame you for downgraded products and services – poor products or services you can’t help because your prices are too low.
You will never win a contest over who charges the least because there is always someone willing to do the work for less.
So, refuse to be bogged down in a discussion of price with your customers and clients.
Focus instead on the benefits you are providing.
Focus on providing value, not cutting prices.
Of course, you must be well worth the prices you are charging.
And that’s the end of our discussion on effectively pricing your products or services.
Disclaimer: Don’t forget this post is courtesy of Benjamin Hart.
I hope you gained some knowledge with this post? Kindly share your comments to it in the comments section below.