Charge what you’re worthAug 29, 2007
WHEN youâ€™re running a business, you can sometimes be so close to it that you miss the “hidden goldmine” of untapped profits thatâ€™s often sitting there right under your nose.
A vivid example was the restaurateur who sought help with his marketing. With some subtle probing, it turned out that his underlying concern was his lack of profitability. He confided that his “bottom line” was just Â£17,000 on a turnover of Â£1 million. He saw marketing as a way to somehow push his sales higher and generate a bit more profit.
“Your problem”, we said, “is that you donâ€™t charge enough.”
“How do you know? Youâ€™ve never been to my restaurant!” he countered.
We responded that we didnâ€™t have to and told him that most businesses underprice themselves. With effective marketing to reposition themselves in a way that “educates” their market to the value they provide, they can charge what they are worth. He was unconvinced.
“Tell us.” we asked, “What is the average price of a meal in your restaurant?” He replied, “Â£25.”
“OK,” we continued. “What would your customers do if you charged Â£27.50 instead? Would they leave you in droves?” He laughed, saying they probably wouldnâ€™t even notice.
“Well, letâ€™s work out the effect of that,” we continued. “Â£27.50 is just Â£2.50 more per meal, which doesnâ€™t sound a big deal. But it represents a ten per cent increase in your turnover and all of that goes to the bottom line, wouldnâ€™t you agree?” He nodded.
“Then would you agree, on Â£1 million turnover, that tiny Â£2.50 extra per meal will be worth Â£100,000 net to you in the next 12 months without a single penny in extra costs?” He kept nodding and smiling.
There really is a potent message here. Itâ€™s this.
Most businesses undercharge. Most businesses work on far thinner margins than they should or that theyâ€™d care to admit. And thereâ€™s a good chance that youâ€™re not charging what youâ€™re really worth.
Thereâ€™s no law that says your product or service has to be a commodity thatâ€™s merely bought on price. Most of your clients will happily pay more, as long as you provide genuine value and as long as they also believe theyâ€™re getting excellent value.
How often are you prepared to pay just that little bit more for a product or service that you know, understand and are happy with? The chances are that as long as youâ€™re sure that youâ€™re receiving good value, you wonâ€™t mind paying a bit more.
Increasing his prices slightly instantly increased the restaurateurâ€™s profits more than sixfold without upsetting his customers. Charging what youâ€™re really worth can also multiply your profits many times, and in some circumstances it can also substantially reduce both your workload and your headaches.
Why do you need to charge what youâ€™re really worth?
Firstly, so that you can afford to make mistakes. Show me someone who doesnâ€™t make mistakes and Iâ€™ll show you a person who isnâ€™t doing anything. In your business you have to keep trying new products; new approaches; new ways of doing things. The richest rewards go to those who arenâ€™t afraid to take a chance. But you canâ€™t do that unless you can afford to be wrong.
Itâ€™s been said that the reason so many big companies survive and small companies go under is that the big companies can afford to do unproductive, inefficient, inept things. It has less to do with them being smarter than other companies than with them being rich enough to survive their mistakes. I hasten to add that thatâ€™s not how they got big. Itâ€™s just how so many manage to stay alive once theyâ€™ve become big.
You have to be financially prepared for the fact that you or someone who works for you will, from time to time, do something idiotic or make a costly decision. Charging enough to cover this eventuality can determine whether or not youâ€˜ll survive.
The second reason is so that you can afford to spend good money on promoting your product or service. If you can sell more of your product or service, you can make more money.
The third is, so that you can make your product or service more distinctive or valuable in the market place by dramatically improving the amount of value or benefit you deliver to your customers. I often meet people who know they donâ€™t charge enough but are still reluctant to raise their prices for fear of losing their customers.
That fear, in many cases, is unjustified. Again and again I have seen that demand for products is much less sensitive to changes in price than you might expect. Convenience, habit, previous satisfaction, concerns over the quality of alternative suppliers and the “better the devil you know” syndrome all make customers reluctant to switch allegiance just for the sake of price. In fact, increasing the price of a product which has a high perceived value often actually increases demand because a lot of people feel that if your product is too cheap, it must also be nasty.
Believe it or not, if you lose some customers at the cheaper end of the spectrum, it can actually boost your profits. Reducing your volume of sales means that you need less money to finance debtors and stocks. It will probably reduce the money you lose in bad debts and eliminate the majority of your stress and hassle. Youâ€™ll become a leaner, fitter business, achieving better returns, using less working capital.
I have clients, and know of other companies, who stopped doing business with customers that cost them money and were responsible for most of their headaches. They now serve a smaller number of clients to a higher standard, with a fraction of the stress… and are many times more profitable. The right pricing strategy can literally make the difference between success and failure.
Before you can charge what youâ€™re really worth, itâ€™s important to answer these three questions:
1 Can I raise my prices on all or any of the products or services I currently sell?
2 If I raise my prices, what further value can I then afford to offer my customers that will set me apart from the competition?
3 How can I educate my customers better to ensure that they understand the value theyâ€™re receiving?
The most important secret to charging what youâ€™re really worth is that your customers must understand and believe that theyâ€™re getting exceptional value. That means that you must educate them to understand the real value you offer. Yet hardly any companies understand how to do that.
If you educate your clients to the value you provide and charge what youâ€™re truly worth, your bottom line will go through the roof. Play with the numbers: what would an extra 10pc turnover would do to your bottom line? If you think it canâ€™t be done or donâ€™t know how to educate your clients, weâ€™ll happily show you how weâ€™ve helped hundreds of businesses to realise their true valueâ€¦ not forgetting that every extra pound you put on your bottom line probably increases the value of your business by between Â£3 and Â£10.
For more information, visit www.dspconnect.com
Robert Clay has been growing businesses since the age of 19. He started his first business with no capital, reaching no.3 in his field in the UK within seven years. His second business reached no.3 in Europe after three years.
After selling both businesses to one of the largest companies in Europe he was persuaded that his self-taught approach to marketing could be used to grow any business successfully.
He subsequently studied and mastered 116 of the worldâ€™s most successful business growth techniques, and since June 2000 he and his team at DSP Solutions have transformed the thinking of hundreds of smart successful business leaders by providing them with world-class knowledge of low-risk/high-return marketing strategies that really work in any business.
His new book and set of CDs, “”Learn how to grow your business … in just two hours.”” are available now for just Â£15 each plus Â£2.25 for post and packing. Order both together for just Â£25 plus P&P.
Call DSP now on 01908 357657 to order your copy or to arrange a free consultation.”