Raise your prices?
As a business owner or leader, how many times have you thought to yourself, “Should I raise my prices”?
Should you? Maybe, or maybe not… Allow me to explain.
I coach and manage sales teams that are collecting multiple six and seven figures in revenue every single month, and one of the primary questions that I get almost everyday is “Wayne, when do we raise prices?”
Well, allow me to ask you a few questions.
How long has it been since you raised your prices? Somehow, this act causes a great deal of anxiety in many business owners. They worry that by increasing the cost of their product or service, they’ll turn customers away.
As a result, they spend all their time and energy attracting and converting new leads to customers instead. You’re leaving a lot of money on the table with this strategy. There is nothing inherently wrong with it, except that you’re leaving money on the table. Your existing customer base is where you make the real money.
Also, consider that with inflation that increases each and every year, unless you have a strategic system to lower costs each year, you are losing profit margins every year with inflation alone.
Next, what do ‘higher prices’ really mean in your company? Is it raising your ice by 5% to adjust for inflation or covering the expense of merchant fees, or are you looking to double your price and move people from one brand to another? (Think Toyota moving people into Lexus)
Also, are you looking to sell a smaller number of units, yet at higher prices, or do you still desire to sell the same amount of units at a higher price
Sal is a coaching client of ours that provides business leaders with done-for-you press release services, while managing their social media. They hired us to help them scale their revenue, while working with less clients. They have a lot of automation, but there is still a significant amount of manual fulfillment for each client. So, they did not want more clients and having to hire more people, they simply wanted to work with higher tier clients and thus make more profit each month.
During the same period we were working with Janice who uses a call center to sell home warranties to existing homeowners. They were operating at a 24% profit margin on each purchase and they immediately wanted to raise their prices. In fact, just before they hired our team they raised their prices from $799 per contract to $999 per contract. However, moving that price actually tanked their closing percentages and they went from a 24% profit per unit to less than 13% due to low closing percentages.
How did we solve the constraints for both Sal and Janice? We began the same way with both clients, yet ended up implementing two significantly different methods.
In both cases we first looked at the process of their sales team, and we closely examined a wide array of sales conversations. Examining the synchronicity of their marketing to the selling process, and then reviewing the actual sales presentation, helped us outline several constraints. Then, we applied a few changes to their discovery and their pitch. Then we measured results each week and made slight adjustments with each evaluation.
Our first big breakthrough was simply getting the sales professional to shift some of their questions and their pitch. This increased sales numbers almost immediately. However, this did not prove to be the raise in revenue that Sal was projecting. The extra clients that Janice brought on with this only led to more fulfillment.
The formula for raising prices is based on a few variables. What percentage of actual sales opportunities convert to closed deals (when the sales professional is operating at an optimal level), how much revenue is collected immediately, and how much contracted revenue is actually collected over the course of the transactional contract? Also, we must look at the lifetime value of a customer, and not just the initial purchase.
Now, there are other variables but these are 3 crucial elements when determining the price of a product or service. So, with Sal we raised their prices by 20% and looked closely at the numbers for the next 3 weeks. We noticed every sales professional was still selling at the same closing percentages as they did at the former price.
After the 3 weeks we raised the price of the service by another 20% and as before we examined the closing percentages and we closely reviewed their sales presentations. At the end of our pricing formula we ended up increasing their rates by over 120%. – yes, we lost some clients, but that was what they desired because of the fulfillment expenses.
Within 90 days they had not only raised their prices by 120%, but they had also cut their workload and fulfillment expenses. Higher profits with less work by scientifically adjusting the prices based around actual data.
Now, the key to getting Janice to her goal was actually lowering her price! Yep, after applying the same strategy we shared above, we noticed that raising the price actually lowered her closing rates even with a lot of attention placed on the selling calls.
So, we lowered her price back to $799 and then tested moving the price up 20% on each call. The revenue and profits dropped significantly over the 3 week test. Going back to $799 would sound like the best solution, yes?
Well, since we had already confirmed the closing percentages at $799 – we actually tested dropping the rate by 5% – and then another 5%.
We quickly determined that they could sell almost twice as many warranties at $679 than they could at $799. They received a 195% increase in sales, and a 90% increase in overall profitability by properly testing the price and validating the proper sales process.
Should you raise your prices? Maybe…. maybe not.
What are all the variables in this equation?
If you would like a complimentary review of your sales process and pricing, feel free to connect with Wayne here on LinkedIn.