Raising prices is often a necessary, if frightening, experience that all businesses must face from time to time. Rather than becoming a source of frustration, however, you can easily turn a price increase into an immensely profitable opportunity with little risk at all.
Raising prices increases not only your per-unit revenues, but also your profits. It is the difference in profits, however, that can be profound – even a tiny increase in price can lead to a remarkable multiplication in profit… profit that you can take to the bank.
A client of mine, Jack, offers fishing kits and gift packages online through his website. Jack offers to include packs of fishing bait as an optional accessory to anyone who purchases one of his fishing kits. The price of his bags of bait is currently $4.99 each.
Jack’s cost for each bag is $3.75. Therefore, he makes $1.24 every time he sells one to a customer.
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It is worth noting, however, that customers who purchase a $150 fishing kit are likely to see a $4.99 bag of bait as a bargain by comparison. As a result, 80% of people who buy fishing kits take him up on his offer and buy his bags of bait.
I convinced Jack to quietly raise his price from $4.99 to $6.97. Even after the price increase, sales did not drop in any way whatsoever; people just didn’t see much of a difference in the cost after already having spent considerably more on other items.
This small price increase, however, ended up almost tripling Jack’s profit margin. In many cases, you will find that even a small boost in price can dramatically boost your profit margin. In such instances you will enjoy the same profit from one sale that you would have earned with two or even three sales at the old price.
Despite the bounty of profits that even a tiny price increase often delivers, you may still be hesitant to hike your prices. The most common objection to raising prices, by far, is the fear of losing customers.
While certainly a valid concern, I have yet to see this fear become a reality in even a single case with any of my clients. In fact, I have often found that with some skillful maneuvering, business actually improves once the new (higher) prices take effect.
Chances are, your prices are far lower than where they could be. Every day you keep your prices lower than what your market can bear, you leave money on the table – money that rightfully belongs in your pocket.
Here are the three key secrets to increasing prices that my clients and I have used to tremendous effect.
Price Raising Secret #1: Use Price Testing to Find Your Sweet Spot
Like most other aspects of business and life, you can “rehearse” a price increase before rolling out in full force. This practice is known as Price Testing, and it is a dependable technique that removes much of the risk and stress associated with increasing prices.
Price testing simply consists of raising your prices gradually, one step at a time, for a targeted portion of customers or prospective buyers. When you use price testing, you gradually increase your price one step at a time, until you reach the optimal price point that gives you the most profits without scaring away valuable customers.
This technique will work best if you have a website that can take orders online. A website offers you the benefit of being able update the prices and track your results almost instantly, allowing you to adjust your strategy at a moment’s notice.
One of my clients who runs a martial arts school. Recently, he used price testing to dramatically improve his profits in a matter of six weeks. My client’s website started advertising a special price for new martial arts students who signed up for lessons at his school.
Originally, my client charged $39 for the first month of martial arts classes. During the first week, however, he quietly increased the price to $45, and noticed no decline in sales.
The second week, the price went up to $49, again with no decline. The third week, the price rose to $57, and sales actually increased. The fourth week, the price went to $67, the fifth week, it was on to $77. On the sixth week, the price went to $87, at which point sales declined very slightly. On the seventh week, the price rose to $97, and suddenly sales dropped off considerably.
My client discovered that his ideal price point for new students was $87 – double his original price. In a short time, through price testing, he opened up tremendous new opportunities for profit in his business, and could afford to spend more on marketing to attract new and even better students to his school.
As a result, my client now enjoys his work more than ever, and has the opportunity to invest in improvements to his school that were previously beyond his reach.
The key to getting the same results is to raise prices gradually and track the results carefully. Above all, when you price testing always be sure move your price upwards. Try to avoid starting from a high price and then lowering it gradually; such a practice will only irritate the customers who paid the higher price only a week earlier. On the other hand, starting low and moving up gradually will actually make your most recent customers feel as though they received a bargain, making them even more loyal to your business.
Price Raising Secret #2: Build More Perceived Value into Your Offer
Once we have discovered the ideal price point for an offer, I often advise my clients to build more value into their offer. Doing so allows them to raise prices even further without any drop-off in sales.
Building value into your offer is easy, and the means to do so are probably already at your disposal.
Going back to our martial arts school owner, I advised him to start including extra bonuses for new students whenever they take advantage of his initial offer. By the next day he started including a private coaching lesson, a free “Martial Arts Secrets” guide, and a $25 gift certificate good towards the purchase of a martial arts uniform to any new students. He also threw in a packet of coupons for nearby cafes and restaurants, which hungry students happily used after enduring an intense martial arts workout.
Offering these incentives for new customers allowed him to dramatically improve the rate at which people purchased memberships in his school. His offer became much more valuable in people’s eyes. As a result, he was able to raise his price to $127 with no complaints.
In addition, he received gift cards from nearby restaurants in gratitude for all of the customers he was sending them by giving out his coupon packet. He then turned around and offered these gift cards to students who committed to year-long contracts with his school, turning his new students into committed customers, and creating a massive surge in his cash flow.
You too can easily turn your offer into an irresistible package that conveys value. Every business has a “flagship” product, service, or package that they typically use to win over new customers. By focusing on stuffing more value into this “entry-level offer,” you will find it easier than ever to raise prices with hardly an objection to be heard from your happy buyers.
Price Raising Secret #3: Focus Your Marketing on Wealthier Buyers
The wealthier the customer, the less of an impression your high price will have on him or her. This probably comes as no surprise.
If you target your marketing towards attracting more affluent customers, you will find it even easier to raise prices. The extra profits from your price increase can in turn go towards improving the customer’s buying experience or providing a higher level of service – ensuring that your new affluent customer becomes a repeat buyer and refers other wealthy buyers to your business.
Using these three simple techniques will make your next price increase far easier and much more pleasant. What’s more, these methods are recession-proof, and work no matter how tough business may happen to be. After all, during a recession, the real money in any market is in its more affluent segments. People with money are rarely affected by recessions, and will better appreciate the value you offer - especially since most of your competitors are likely cutting corners to weather the tough times.
Tough times for them, perhaps – but you know better!
Daniel Lorente is the author of How To Prosper in the Coming Recession and The Unfair Advantage Guide to Attracting All The Customers You Can Handle. President of the Aphelion Marketing Institute, he gives seminars and publishes Internet Sales Review magazine for professionals across the world. Daniel Lorente also speaks at conferences and trains executives on becoming more persuasive.
Daniel can be reached at 1-800-440-8057, or by e-mail at daniel@aphelionmarketing.com.
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