Raise your prices!

Written by Rick Spence

Shortly after delivering a recent speech, I encountered Michael, a consultant friend who asked what I was speaking about. “Ten Quick Fixes for Your Business,” I said. “Well,” he sniffed, “I assume No. 1 is to raise your prices.”

I had to admit that raising prices wasn’t on my list at all. But I insisted that my No. 1 fix — the need for businesses that produce “commodity” products and services to become niche specialists — was an adequate alternative. Then I resolved to research how big an opportunity this might be.

My research took me to the Vancouver suburb of Coquitlam, where Bob Burnham and Jeff McCallum run a disaster-recovery services firm called BurnMac Services Inc. Founded in 1976, BurnMac enjoyed many great years. But by the 1990s, competition had increased and margins were falling.

Burnham and McCallum are nothing if not ambitious: they spend up to $40,000 a year on management programs, seminars and CDs. And they’ve learned that too many people charge too little for their services. “Small businesses are really undercutting themselves,” says Burnham. “They’re so close to being successful. If they raised their price just 5% to 10%, it could change their lives.”

It’s a matter of margins. Let’s say you’re a typical service business grossing $1 million a year and making a profit of 3.5% to 4.5% of sales. “You’re working your tail off for $40,000 a year,” says Burnham. But if you can raise prices 10% while keeping costs steady, your net income becomes $140,000. Your profit margin has more than tripled.

Some companies are overdue to boost prices. Many solo consultants have put off raising their fees for years. Retailers worry about losing market share if they pass on their higher costs. Shopping the competition or buying a compensation survey from their industry might give these businesses the confidence they need to raise prices.

For most companies, though, price hikes require raising the perceived value of the product. This is where BurnMac shines. Seven years ago, Burnham decided to upgrade his services and boost prices. BurnMac staff switched to black ties and crisp white shirts. They get training every week, whether it’s in providing better service or getting better at reassuring distraught, flooded-out homeowners. And each employee carries a three-ring binder stuffed with letters of praise from customers. In return, employees also get paid more, which reinforces their service ethic.

“You can’t just raise your prices 30% and not do anything,” says Burnham. “By the time customers go through those testimonials, they’re in a better headspace to pay our prices than they were before.”

Not all customers are looking for the lowest bid. BurnMac has two types of customers — homeowners and insurance companies — and they’ve both proved happy to pay for service. “If you get good at it, you’ll get more customers than you’ve ever had,” says Burnham. Better still, “there’s not as much competition in this end of the market.”

In Fredericton, Andy Buyting, president of Green Village Home & Garden, is exploring the power of positive pricing in the saturated world of New Brunswick retail. Buyting, 34, has worked in what’s now the province’s largest garden centre since his parents founded it in 1988. He took over in 1996 and survived a disastrous fire in 2000, but his plan to expand to other cities stalled because the store’s profitability didn’t justify expansion.

Buyting tried the usual ways to boost profits: cutting costs and smarter buying. But he decided the real benefit lay in raising prices. Reviewing all the products Green Village sells, he decided about half were price-sensitive. On the other 50%, Buyting slowly raised prices by 5% to 20%.

In spring 2006, Buyting raised the price of his best-selling SKU — a tray of 12 bedding plants — from $4.99 to $5.99. His wary staff watched to see if they would have to roll the price back, but they found no resistance. Buyting says some customers even bought more, presuming the higher price meant higher quality. That single price change boosted profit by $16,000.

In 2007, Buyting ordered the same plants in trays bearing the Green Village logo, and raised the price to $6.99. They sold out in no time. The lesson: “In retail, we’re more scared to raise prices than our customers are to pay higher prices.”

Like Burnham, Buyting says you can’t boost prices in a vacuum. He invested in staff training, spruced up the facilities and brought in more specialty merchandise, stealing the funds from his advertising budget. “Once you’ve provided a better shopping experience, you can raise prices 5% and it will go straight to the bottom line.” In three years, Buyting has raised his gross margin by four points, and he is now building a store in Moncton, with a third planned for Saint John.

The result of my investigation? Raising prices is indeed the No. 1 fix for many businesses. But it only comes from differentiating your message and your product. Which means Michael and I were both right after all.

Originally appeared on PROFITguide.com