The fastest way to improve profitability
The quickest and most effective way to improve the profitability of your business is to raise your prices, according to Peter Hill in his book Pricing for Profit: How to Develop a Powerful Pricing Strategy for Your Business. You should also be aiming to increase the number of customers, the frequency of transactions, the average value of each transaction, and the efficiency of the business, but price rises have the fastest and most direct effect on your profits.
The problem is that most business owners find it very difficult to raise prices. People naturally want to please others and avoid the risk of complaints and confrontation, so they find it much easier to pursue almost any other course of action. Accordingly, the author provides numerous different suggestions of ways in which prices can be increased in a manner which minimises the amount of stress and the fear of losing valuable customers, including:
- Limit discounts, for example by requiring timely payment in exchange
- Replace all discounts with cash-back offers, as the cash is not given back until payment is made and it is more painful to give cash than a discount, so that the total amount given away is likely to reduce over time
- Use prices which are not round numbers, because they are less likely to attract bargaining
- Instead of giving discounts, add more value to your offering
- Make sure you communicate the value which you are providing
- Build future contact into the deal for the initial sale
- Have a very top-of-the-range option that is significantly more expensive than any other option; this will make your other offerings appear to have better value
- Ask customers for permission to increase prices
- Offer a money-back guarantee to justify a higher price
The contents of the book are easily understandable by a business person who has no training in financial management. I did not find anything particularly new while reading, but by the end of the book the author had thoroughly persuaded me that trying to win customers by offering bigger and bigger discounts is not likely to lead to a profitable outcome. I highly recommend the book for anyone who runs a business.