The decision to raise or lower prices is a tough one, with many ramifications for your business. But the decision whether or not to change prices is not as important as the decision about how to accomplish the change. Two companies that change prices on the same products by the same amount may get widely different results depending on how they implement the new policy.
Raising and lowering prices effectively involves careful attention to timing. It requires knowing how to affect your customers’ perception of the value inherent in what you are selling. It forces you to study and accurately predict reactions from your competitors.
Sometimes businesses announce major price hikes, even doubling their previous rates. One theory is that a single large price hike will get the pain over with. Businesses may also announce large price hikes when they’ve experienced major increases in the price of a key ingredient or cost component. A company that is being overwhelmed by sales volume from an unexpectedly popular product may jack up prices to reduce demand to a manageable level.
However, most price hikes are done in stages on the theory that customers will be accustomed to higher prices over time and willing to tolerate them as they become more loyal. A series of smaller hikes may not even be noticed by customers who would be seriously put off by a single large one.
If you have more than one product, consider raising prices on some items while leaving the others the same, or even lowering them. Some customers are sensitive to the slightest price hikes for a particular item while mostly ignoring other increases. Automobile dealers use this to their advantage by cutting prices on cars and attempting to make much of their profit on less price-sensitive accessories like fancy paint jobs.
Picking the right time
If you decide to raise or lower prices, pick the right time. If you’re lowering prices, choose a time when the change will have the most impact; if you’re raising prices, choose a time when you’ll encounter the least resistance. Your business’s seasonality, growth stage and sales cycle affect your choice.
Many retailers raise prices seasonally, usually near Christmas when rushed shoppers pay less heed to prices. A brand-new store early in its growth stage might delay a price hike to gain market share. A computer store catering to businesses is likely to time price changes to coincide with new models.
It may be tempting to put off raising prices until after a busy season ends. After all, higher volume may make up for lower per-unit revenues. Gouging should never be a part of your price-raising strategy. But the time to raise prices is when your product or service is in demand.
Changing value and price
Prices don’t exist in a vacuum. Like the earth under your feet, a price is supported by the value the customer perceives in the product or service to which the price is attached. Thinking about price and value in this way makes it clear that this is at least a two-dimensional problem. That is, you can change the pricing and leave the value alone, or vice versa. You can also change both value and pricing or leave them both alone. Any one of these changes can be tailored to have the same impact on your bottom line, at least on an individual unit basis, but they may have vastly different effects as perceived by customers.
An example of changing the price without changing the value is when a grocery store holds a sale on a popular consumer item. A case of Coca-Cola is a well-recognised commodity; shoppers have a firm idea of what a dozen cans of Coke are worth. If a retailer charges less than that amount, shoppers will be attracted. Charge more and shoppers will be repelled.
Many businesses change value without changing price. For instance, if the packaging of ground coffee slowly shrinks from 750 grams to 700 grams, the coffee makers are able to maintain the perception of holding prices steady or even reducing them, while they are in reality increasing the per-gram charge for ground coffee. Shoppers who notice such shenanigans may resent them. But if a competitor makes a value change, many companies feel they have to follow suit or be perceived as high in cost.
You can complicate the picture by changing both value and price simultaneously. For instance, a grocer could raise prices on Cokes but include a free insulated can holder with every purchase of two or more cases. Changing value and price simultaneously may confuse customers, so it’s a good idea to figure out which element is most important – the value of the can holder or the extra prices on Cokes – and stress that in promoting the offering to the marketplace.
Many businesses get the best long-term results from increasing price and value. Others find that they can cut their own costs while increasing value and thereby offer an almost irresistible proposition to customers. But the key lesson about value and price is that these elements can be adjusted to move demand and increase sales without changing what it actually costs you to make a product. Careful attention to what happens when you move pricing and value points can show you the way to pain-free, profitable growth.
Excerpted from Growing Your Business
If You Want Scale, Fail Fast And Learn Quickly
Mindset, focus and an understanding of scale are essential if you want to build a highly profitable, growing business.
“The secret to scaling a business is increasing revenues without incurring a corresponding increase in operating costs,” says Tom Asacker, author of The Business of Belief, Opportunity Screams, A Little Less Conversation and A Clear Eye for Branding, all groundbreaking books that redefine business and communication for the new age of abundance. “The single most important challenge is to have a deep understanding of your value creation and customer attraction and retention process, as well as how the company will ultimately make money over time through the unique realisation of that process.”
According to Howard Sackstein, founder of Saicom Voice Services, scale used to be measured by the number of people you employed or the number of branches you opened. “Today, these questions have become irrelevant,” he says.
“When Whatsapp was sold for $19 billion the business had only 55 employees servicing 450 million users who were sending 34 billion messages a day – that’s a tiny company with enormous scale. So, today scale has come to mean something very different. In the new economy, scale is about scalable technology, how do we build software and apps that can cater for a billion users? The ideas of lots of employees and lots of offices has become old fashioned.”
The problem is that scale comes with costs and that’s why money is often the enemy of entrepreneurship. “Many of the great businesses of the new economy all began in garages, a small group of people, each with real skills each trying to bootstrap an idea to see if it worked,” continues Howard.
“Often people go looking for funding; there’s a problem there too though – they scale too fast once they receive the cash and ultimately they fail because they have too much money. Entrepreneurs need to start small and if they fail they must fail fast. They need to test the market and grow incrementally to prove their idea. Once the idea has achieved a degree of adoption and has ‘crossed the chasm’ of technology adoption, only then can you start thinking of scale. And today scale means few costs, few employees, and tech that can scale to a mass market.”
Your Mindset is Everything
Your mindset while scaling is critical. “Value creation, customer attraction and your retention process are the result of every decision you make as an entrepreneur,” says Tom. “Your mindset shapes how you make these decisions.
“Every rand spent should be to add value in the eyes of the customer, or to improve the process that delivers that value, through automation, distribution, channel partners and so on.
“If businesses aren’t hyper-focused on adding value and deepening relationships with customers, someone will come along who will. If that happens, whether or not that process produces rapid growth is beside the point.”
Howard believes that follow-through is also essential. “So many people really want to build empires,” he says. “But how do you measure your success? Is it the number of employees you have, the number of companies, your disruptive influence on the market, revenue or actual profitability?
“You really need to decide this up front and that will affect your strategy. I probably have an old school mentality, but for me profit is everything. I don’t really understand the idea of focusing on scale with no business model in the hope that on an exit someone will find value. I know that’s a common idea in the tech world and you could get lucky by following it, but I think there are few people with that degree of luck – build for profit and sustainability, build as lean as possible and keep your eye on the actual ball.”
See Howard Sackstein and Tom Asacker live at the fourth Secrets of Scale event, which will be taking place at the MESH Club in Rosebank on Monday, 11 June. Buy your tickets online here: www.qkt.io/secretsofscale
Do You Have That 1 In 100 Business That Can Scale And Land An Investor?
Only 1% of businesses are investable, mainly because that’s how many businesses can 10x their growth. There’s an art to scaling, and it starts with you.
Only one in every 100 applications typically receive funding from venture capitalists. All 100 applicants believe their businesses are scalable and worthy of funding – and yet only 1% actually close investment deals.
“Most entrepreneurs radically overestimate their prospect of success and scalability,” agrees Jason Goldberg, founder, and CEO of 10X-e and co-founder of Edge Growth.
“If you really want to scale your business, you need to know that you are absolutely obsessed with solving a problem that hasn’t been solved before – so obsessed that you wake up at night with solutions buzzing around your head; so obsessed that your mind is always on the problem you’re trying to solve. The reality is that hunger is an incredibly important success factor – hunger, the hours you’re willing to put in and your level of intensity. How far are you willing to go and how many obstacles will you overcome?”
With this in mind, Jason and Vuyo Tofile, CEO of Entbanc Group, a fintech and digital support services firm share their top 3 secrets of scale.
1. You need to shift into a ‘scale’ mindset
Start-up entrepreneurs are focused on the hustle: More work, more energy, more sales. These are all important factors in building a business, but scaling a company requires a different focus. “Scaling up is all about architecting an enterprise and strategically putting in place the building blocks that will move you from working primarily in the business to working on the business,” says Jason.
“You need to minimise the work in the business so that you can work on the business and build a great company.”
This is easier said than done though. Often the biggest stumbling block to a company’s ability to scale is the founder. “The company founder or owner’s inability to really focus on solving an initial problem for specific target market, understanding what their business really does and is offering, and finally how to truly replicate that service or offering can be major barriers to growth, and they all lie with the entrepreneur,” says Vuyo.
The lesson is clear – you can hustle and make sales without clear structures and strategies in place, but that won’t get you to scale.
“A lot of entrepreneurs love the innovative and creative mind space of start-ups as well,” adds Jason, “which is great, but scaling is all about executing all those great ideas that you innovation and creativity helped you to come up with. If you can’t do that, you’ll never be able to scale.”
“Having the ability to execute on growth is critical,” agrees Vuyo. “Execution of the vision is far more important than having a strong vision. Vision without execution is meaningless.”
2. Get the right team in place
According to Vuyo, if you want to scale your organisation, you need the right people on board – and this too is a crucial skill the founder needs to foster. “You have to be able to build an effective team around the business,” he says. “You don’t need to be able to do everything yourself – in fact, in order to scale you mustn’t – but you do need to know who you need and where you need them.”
For Jason, the lead indicator of your ability to scale is whether or not you can build a sales organisation. “Can you shift from selling to becoming the architect of an organisation that sells for you?” he asks.
Alongside this ability is shifting from hiring who you can afford to who you need. “Start-ups hire talented ‘jack of all trade’ young high potentials (who are typically overworked and underpaid). This is an essential start-up tactic. Mature firms in scale-up mode need seasoned leaders who can take each part of your business to the next level.
“Having an awesome team is your most important ingredient of success. Every senior person needs to be pretty impressive in general, spectacular in their roles, and work well as a team.”
3. Understand if your business is scalable
Not all businesses are scalable – and that’s fine. Not all entrepreneurs want to scale their businesses either. However, if you do want to scale, it’s important to know if your business falls into the scalable or un-scalable category.
“There are three basic rules of thumb,” says Jason. “First, how big is the problem you’re solving? Is this a problem that lots of people have and are willing to spend money on the solution?
“Second, what kind of problem is it? Is your solution a vitamin pill or a headache pill? How does your client feel if you don’t exist? You’re not scalable if they don’t have a painful experience without you. In other words, do they have a headache if they haven’t seen or heard from you today?
Related: Is Your Business Ready To Be Funded?
“Finally, how different is the value you bring to your client than all their other alternatives? You need to be ten times more valuable than your competitors. If you’re not, there’s too much competition, and you’re unlikely to 10x the business.”
Vuyo agrees. “Scale is all about having a service or product that is of real, tangible value to your customer. All the resources and brand equity in the world won’t help you scale if you aren’t providing real value.”
See Jason Goldberg, Vuyo Tofile, Shark Tank investors Marnus Broodryk and Vinny Lingham live at the third Secrets of Scale event, which will be taking place at the MESH Club in Rosebank on Monday, 4 June. Buy your tickets online here: www.qkt.io/secretsofscale
Secrets of Scale Event #3
PART 1 – BUILDING THE AEROPLANE
This segment will be the majority of our focus and will cover practical “how to steps” for scaling your business. We’ll be revealing how to design a scale ready business and walk you through common pitfalls that all entrepreneurs will encounter as they “build the aeroplane” and how to avoid them. We’ll also reverse engineer how to design a scale ready business from a 150 strong team all the way down to a 5 person team.
PART 2 – BUILT FOR WINTER
This segment is all about how to ensure that you remain profitable as you scale. We’ll unpack how to bring different revenue streams, partnerships and products/services to together to help you weather any storm.
PART 3 – SCALE BLUEPRINT
In this segment we’ll explore the systems that can help you scale, how to automate repetitive processes and outsource non-essential tasks and how to design a business that makes more money while you sleep than when you’re awake.
Listen to the podcast here:
Growing Your Revenue In A Slow Economy
The dos and don’ts for your business.
The most dangerous counter to the unpredictability of any economic crisis is… doing nothing. The same everyday attitude can ruin any company. But what’s the next most dangerous behaviour? Clumsy or uncontrolled reactions.
What is needed, therefore, is finding and embracing the less common but noteworthy opportunities that unveil themselves during slow economic times.
You can do this in two stages.
- First: steady your company by sheltering it from associated dangers and make sure that it has the cash flow needed to stay afloat during the crisis.
- Only once you’re confident that you’ve adequately prepared for the worst, should you approach the second stage: looking for ways to grow your revenue over time.
An article by Gulati, Nohria & Wohlgezogen in Harvard Business Review (2010), indicates that, “…a subset that deploys a specific combination of defensive and offensive moves has the highest probability of breaking away from the pack. These companies reduce costs selectively by focusing more on operational efficiency than their rivals do, even as they invest comprehensively in the future by spending on marketing, R&D, and new assets. Their multipronged strategy…is the best antidote to a recession.”
Stage 1: Steady your company
In the first stage of stabilising your business in a recession (especially one that could continue to slide), take the time to methodically evaluate its weak points.
- Test out a few economic scenarios both at department level and across the broader business. Assess how each might impact your organisation, and cautiously calculate the financial effects. Then find ways to reduce your exposure. Make sure that you have sufficient cash flow and access to capital, to sustain your financial stability.
- Make a strong and targeted effort to lower expenses and boost efficiency. But, while it’s imperative to be fast, it’s also essential to have a rational, cautious, and well-thought-out plan. Don’t make radical cuts that will damage your business in the long term – by, for example, risking valuable future opportunities.
- Remember that cutting expenses boosts profits, but only if the sales price and the quantity of sales stay the same. If a reduction in expenses affects the quality of your products, you may need to consider lowering your price to maintain sales. This is critical as it can cancel out any potential returns and ultimately end in a loss.
- As your customers’ needs change, re-evaluate your pricing strategies and product mix. This may mean raising prices through effective branding, like Coca-Cola and Sony have done. These organisations have such strong brands that they can get away with charging higher prices than many of their competitors… all while growing their market share and preserving quality status, even during recessions.
- You can sell off non-core businesses and peripheral (or poorly performing) operations. Don’t hold out for ‘better times’ in the hope that you’ll secure the price you would’ve gotten when the economy was stronger. If the company isn’t essential to your goals and it increases your risks in the recession, sell it now.
Step 2: Prepare for the future
- A common challenge that many businesses encounter is inflexible or obsolete business models. Reconsider yours. Innovation in technology and media is constant, yielding a perpetually evolving business landscape. The traditional publishing industry is a perfect example of this.
- Do things differently and don’t be afraid to stand out by marketing your product in a novel way. Take Jordan’s Furniture: a US furniture outlet that sells more furniture per square foot than any of its competitors thanks to a strategy called “shoppertainment”.
- Consider pursuing transformative opportunities like mergers and acquisitions. If your business is relatively strong financially and strategically, a recession can be a rare opportunity to boost your competitive position. According to a Harvard Business Review article by Rigby and Harding (2009), “…companies that acquire in bad times as well as in good outperform boom-time buyers over the long run.”
Bottom line? Businesses that can find calculated and clever ways to balance lowering expenses to endure today and carefully planning and investing to grow tomorrow are most likely to survive and thrive after a period of economic recession.
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