Tough Trading 101: Pricing under pressure

Kirsty Young Advice and Tips

With high inflation and the cost of living increasing at a vast rate, many businesses have followed suit and are raising their prices. As a result, business owners need to look at their own profits, and their ‘margins’ to see how this rise in costs will impact their business.

With this information at hand, it’s often the case you will need to consider changing your prices.

 

Quick recap on margins

If you’ve not heard of margins or unsure of how to calculate them, please check out our previous blog on the subject, where we show some worked examples.

 

Thinking about dropping price? Do the maths

Many owners will instantly think that dropping their price will be a way to:

  • Gain more customers
  • Retain their existing ones

And/or

  • Be more competitive.

In most cases, dropping prices can be disastrous for your business.

If you do the maths, in most cases you will need a significant increase in customers to make up for the loss of income from a price reduction. Consider this example:

A simple business is turning over £150,000 a year.

Now let’s tweak the figures. This next screenshot shows the impact of cutting your price by just 10%,. We’ve also presumed that by cutting prices, you would gain an extra 20% of new customers (which is pretty generous, tbh).

As you can see, by cutting prices by just 10% and even with 20% more customers, you would actually lose £8,000 a year! Yikes!

In order just to make the same money with a 10% price cut, you’d need to gain an extra 43% of customers…… That’s 43% more work for the same profits. Who wants that?

There are some cases where price reductions make sense. For example, you might want to get some cashflow going if you are sitting on old stock that’s just not shifting. However, as an overall strategy, price reductions for most small business will have a highly negative impact on your finances.

 

Small changes can do big things

After seeing the numbers, you may be convinced that reducing price isn’t an option for you. However, you are really concerned about price rises, especially for(??) your existing customer base.

Well, it’s maths time again! You don’t have to make massive increases to make a difference. In this next example, you raise your prices by just 3%, and also expect to lose 5% of your customers.

As you can see, a small 3% increase gains you £1775 a year, even with a 5% loss in customers.

We’ve carried out this exercise with many small business owners over the years. In the vast majority of cases, experience has shown us that you won’t even lose 5% of your customers.

What’s more, you could actually afford to lose around 9% of your customers, and still make the same money.

 

It’s tough for everyone out there, so give some thought to rises

Now the maths is clear, rising prices are generally a good thing for business profits. However in a time where prices rises are everywhere, and the economy has such high inflation, a measured approach is advised.

For example, just raising all of your prices 10% “cos of inflation” is:

a) probably not required

and

b) likely to have your customers rolling their eyes…

One tactic is to look at each and every one of your products and services. Then deal with the poor performing lines first. As a result, you may not need to increase all of your prices by some universal flat amount.

You may find you do need to increase some products or services by 10% (for example), but you may leave others completely alone.

 

The Dear Valued Customer email

You’ve probably already received one or more of these, that impersonal email that basically says “Inflation = we are rising prices”.

How did that make you feel?

Not great, we suspect.

Communicating price rises is a challenge, but I think we can all agree this is probably not the best method. We’ve seen these methods work well:

  • Personal communication. Where possible, 1-2-1 conversations are best.
  • Explain and/or repackage your products and services for better value. Remember to show the benefits, not just the features!
  • Give options if possible – are there other package options a customer could choose? Can they upgrade what they have?
  • A stand-alone blog giving details rather than just a bland statement.

 

A side note on just getting better

We’ve shown you the maths of raising prices, but there is so much more you can do to be more profitable.

A holistic view (overview) of the impact of multiple things together can make a massive difference to your profits.

For example, you could look at the impact of a small improvement on:

  • Your number of leads
  • The number of times a customer buys from you
  • The average sale value of each transaction
  • Your customer retention rates
  • How often you ‘convert’ a lead into a customer

Small, incremental changes across all of these have a magical impact that’s far great than the individual changes may look.

 

Feeling lost by all of this?

Trying to look at the big picture for your own business can be difficult. Many business owners find it difficult to see “the wood for the trees”.

This is where some professional input can really help. For example, the screenshots in this blog come from a piece of software we use with small business owners as part of our business advisory services.

We can help by taking a look across your whole business, not just pricing. This also means we can assess the synergistic impact of all of the factors discussed to really improve those profits.

In other words, we can see the wood for the trees, and advise which bits of the wood are most valuable, what areas need trimming, and even the areas you might like to simply cut down!

Book a consultation with us now so you are prepared and (hopefully) one step ahead of your competitors. You don’t have to become a client, so it’s a great way for you to get the help, when you need it.