Q. What are some practical ways to determine if I should be increasing the cost for my product/services?
Andy, Providence, RI
The following answers are provided by the Young Entrepreneur Council (Y.E.C.). Founded by Scott Gerber, the Y.E.C. is an invite-only nonprofit organization comprised of the country’s most promising young entrepreneurs. The Y.E.C promotes entrepreneurship as a solution to youth unemployment and underemployment and provides its members with access to tools, mentorship, and resources that support each stage of a business’s development and growth.
A. Profit Per Client!
If you have many clients at a lower margin (profit/client) & cost is the only element with which you’re attracting new clients, it’s time to pick a niche, dominate that niche based on your expertise or advantage, & raise the prices. Be selective in who you sell to or work with, give them the best experience & most value, then proudly charge for that experience & value they can’t get elsewhere.
A. Ask Your Customers
Send out a survey to your customers and find out why they purchased from your company and analyze the data. Use opinionmeter.com to design and distribute your survey across any medium. To increase the amount of completed surveys, offer a prize or a monetary incentive.
A. Just Do It!
If the idea of increasing your costs is already a question in your mind, it’s time to just do it. There will obviously be customers that will fight it, and some could leave, but you don’t want those customers anyways. Those customers aren’t loyal customers and would be gone anyway in the future if another provider undercuts your pricing. Never compete on pricing, it’s not fun.
A. Abide by the Rules of Supply and Demand
In consumer goods, I strongly believe in the laws of supply and demand. You can not rationally increase the cost of your product or services without seeing an increase in demand from the target market. Ideally, any improvements in quality, service and offerings that your company makes will be noticed, and in turn drive demand and push your product or service into an appropriate pricing structure.
A. Crunch the numbers
Figure out your ideal hourly rate. Take a hard look at how much time you’re actually spending on the services you provide. Are your flat fees actually translating to the hourly rates you deserve? Resources like Freelance Switch’s Hourly Rate Calculator, Laurie Lewis’s book What To Charge, and simple research on what the market will bear can help.
A. A/B Test Your Pricing
Best way to test increasing your product cost is to increase your product cost and test your results against your previous price point. That could mean simple webpage a/b testing, or going into a new market with a new price and seeing the result.
A. Test different pricepoints!
You need to sell your product based on the customer’s willingness-to-pay (*not* on your cost of production). So try to segment your market and target different pricing to different customers. See if the market will bear a higher price, then you will have your answer.
A. Don’t forget that it’s value to the customer
One reason undercharging occurs is because we undervalue what we do – this is especially true in services because the ways we serve our clients is so innate to us that we forget how valuable those solutions are. It’s not about your perceptions of value – it’s about your clients’ and customers’ perceptions. Ask select groups what it’s worth for them and test the prices people will pay.
A. Shelf life
Are your current sales exceeding your expectations of what you thought you would sell? If so and it is consistent, it may be a good idea to increase the cost of your product/service. If demand is greater than supply, it is a safe move to increase your cost, but if supply is greater than demand, you may be stuck with your items. Give it a shot, worse case you can always lower the price again.
A. When Your Costs Increase
It’s evident that as time goes by products get pricier and continue to increase where it cost you the business owner. If you’re a fence installer and you sell vinyl fencing, the product increases because it’s made with petroleum and it happens to be in demand. Your cost goes up to purchase, causing your asking price to increase. You need to make sure customers understand this too.
A. Make Sure Someone Complains
As bad as it sounds, if no one is complaining about your cost, you may want to raise it. Sure one goal is to make your customers happy, but part of a business is bringing in profits. If 100% of your customers are OK with your price, see what happens if you raise it. Maybe 99% will still be happy with the price, but you may be much more profitable and have a much stronger overall business.
Nick Cronin, ExpertBids.com
A. Research Your Competition
Easiest way is to research your competition. If your price is lower, and there’s room to move up without losing your competitive edge with pricing, you can do so. At my bar and restaurant, the Village Pourhouse, I noticed my bar prices were close to competitors but food prices which is secondary to my business model was too cheap compared to others. So I increased food prices by 10-15% across the board. My revenues went up accordingly meaning it didn’t affect my business.