Small-Business Guide
Real-Life Lessons in the Delicate Art of Setting Prices
Jeff Swensen for The New York Times
To raise prices, Naomi Poe, founder of Better Batter Gluten-Free Flour, had to convince customers her products offered added value.
By EILENE ZIMMERMAN
You're the Boss
Why Is It So Hard to Raise Prices?
Have you tried to raise prices? What has your experience been?
Quick Tips:
From Rafi Mohammed, a pricing consultant and author of “The 1% Windfall: How Successful Companies Use Price to Profit and Grow” (Harper Business):
Create a baseline and set goals for improvement.
Don’t set prices only by marking up the cost of your product or service by a certain percentage. Look also at what your competitors charge and determine why your product is worth more.
Give your customers choices, like off-peak pricing or tiered pricing, where the price varies depending on enhancements to the product.
Talk to your customers to understand their needs. You may find they will pay more for access to a help line or would be willing to order in volume for a small discount.
The fear, of course, is that raising prices will send customers fleeing. While that can happen, many small businesses have raised prices and lived to tell about it.
They echo a common sentiment: setting prices strategically is not just about the numbers. Buyers are not necessarily looking for the best price, said Mark Kronenberg, founder of Math 1-2-3, a New York-based tutoring and test preparation company.
“I learned it’s a misconception that if you raise prices too much, you’ll have no business,” Mr. Kronenberg said. “There are many customers who shop based on quality, not lowest price.”
Over the years, some prospective clients have balked at Mr. Kronenberg’s rates — his highest hourly rate is now $200 — but he said the company has more than made up for the losses by attracting and retaining higher-end clients who are more inclined to keep a tutor for a long time.
“I think it’s best to avoid a race to the bottom,” he said. “It’s an easy race to win, but you won’t have a lot of profit to show for it.”
This guide offers examples of small-business owners who decided to raise prices and the lessons they learned.
DON’T ASSUME PRICE IS ALL About three years ago a computer error caused all of the prices on Headsets.com to be displayed at cost rather than retail. With the lower prices on display for a weekend, Mike Faith, the chief executive, expected sales to soar. Instead, the increase was marginal. “It was a big lesson for us,” Mr. Faith said.
He realized that sales for his company, which is based in San Francisco, were far less dependent on price than on what he now says differentiates his business: customer service. “Every call we get is answered by a human being within four rings,” he said, “and our reps are well trained and know a lot about the headsets.”
Since the incident, Mr. Faith has raised prices once, by 8 percent and without much fanfare, although regular customers were told in advance. The result? Revenue rose about 8 percent as well.
“Over all, we didn’t notice any change in sales revenues, but all our sales were of the higher margin,” he said. “Did some customers not like the price? Yes, I’m sure. But that’s the case with any price you charge — there’s always somebody cheaper. The truth about pricing is it’s an art with a little bit of science, rather than a science with a little bit of art.”
Melanie Downey, the owner of Wilava, which manufactures and sells natural skin care products, also assumed that her customers were motivated primarily by price. Over time, she realized she had set prices too low to sustain the business. Yet she hesitated to raise them because she wanted her products to be affordable for those who needed them, and many of her customers have cancer or severe skin problems, including children with eczema. Concerned about maintaining trust, she decided not to act until after the company’s spring busy season.
The increase will range from 4 percent to 20 percent across Wilava’s line. Ms. Downey has been alerting customers in person and has gotten positive, even encouraging, feedback. In the next few weeks she will begin telling online customers. “I’m nervous about that,” she said, “since I won’t get immediate feedback.”
Still, looking back at the last year, she said, “I wish I had done this months ago.”
RIVALS’ PRICES MAY NOT MATTER A lot of small-business owners set prices just by looking at what their competitors charge. Naomi Poe, founder of Better Batter Gluten Free Flour near Altoona, Pa., learned that it is important to try to understand how your customers value your product.
In the food industry, Ms. Poe said, customers generally look for the cheapest price, but because her flour and baking mixes contain no gluten, they cost more to manufacture. She initially tried to compete with products that contain gluten on price but lost money on every sale.
“I learned it’s a misconception that if you raise prices too much, you’ll have no business,” Mr. Kronenberg said. “There are many customers who shop based on quality, not lowest price.”
Over the years, some prospective clients have balked at Mr. Kronenberg’s rates — his highest hourly rate is now $200 — but he said the company has more than made up for the losses by attracting and retaining higher-end clients who are more inclined to keep a tutor for a long time.
“I think it’s best to avoid a race to the bottom,” he said. “It’s an easy race to win, but you won’t have a lot of profit to show for it.”
This guide offers examples of small-business owners who decided to raise prices and the lessons they learned.
DON’T ASSUME PRICE IS ALL About three years ago a computer error caused all of the prices on Headsets.com to be displayed at cost rather than retail. With the lower prices on display for a weekend, Mike Faith, the chief executive, expected sales to soar. Instead, the increase was marginal. “It was a big lesson for us,” Mr. Faith said.
He realized that sales for his company, which is based in San Francisco, were far less dependent on price than on what he now says differentiates his business: customer service. “Every call we get is answered by a human being within four rings,” he said, “and our reps are well trained and know a lot about the headsets.”
Since the incident, Mr. Faith has raised prices once, by 8 percent and without much fanfare, although regular customers were told in advance. The result? Revenue rose about 8 percent as well.
“Over all, we didn’t notice any change in sales revenues, but all our sales were of the higher margin,” he said. “Did some customers not like the price? Yes, I’m sure. But that’s the case with any price you charge — there’s always somebody cheaper. The truth about pricing is it’s an art with a little bit of science, rather than a science with a little bit of art.”
Melanie Downey, the owner of Wilava, which manufactures and sells natural skin care products, also assumed that her customers were motivated primarily by price. Over time, she realized she had set prices too low to sustain the business. Yet she hesitated to raise them because she wanted her products to be affordable for those who needed them, and many of her customers have cancer or severe skin problems, including children with eczema. Concerned about maintaining trust, she decided not to act until after the company’s spring busy season.
The increase will range from 4 percent to 20 percent across Wilava’s line. Ms. Downey has been alerting customers in person and has gotten positive, even encouraging, feedback. In the next few weeks she will begin telling online customers. “I’m nervous about that,” she said, “since I won’t get immediate feedback.”
Still, looking back at the last year, she said, “I wish I had done this months ago.”
RIVALS’ PRICES MAY NOT MATTER A lot of small-business owners set prices just by looking at what their competitors charge. Naomi Poe, founder of Better Batter Gluten Free Flour near Altoona, Pa., learned that it is important to try to understand how your customers value your product.
In the food industry, Ms. Poe said, customers generally look for the cheapest price, but because her flour and baking mixes contain no gluten, they cost more to manufacture. She initially tried to compete with products that contain gluten on price but lost money on every sale.
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