It’s a common fear but your existing clients will be less price sensitive if you are doing a good job.
Have a look at this example (numbers rounded for simplicity) of how many clients you can afford to lose without impacting your profit:
• You have 100 clients paying £1,000 each so turnover of £100,000
• You make 50% margin so profit of £50,000
• Della comes along and tells you to increase your prices (see the last two weeks for how and why you should do this) by 10%
• You now have 100 clients paying £1,100 each so turnover of £110,000
• Your margin is now 54.5% so profit of £60,000 ie a gain of £10,000 because all your pricing increase is profit
• Some of your clients aren’t happy and 10% decide to leave
• You now have 90 clients paying £1,100 each so turnover has fallen slightly to £99,000
• But your 54.5% margin means that you are still making profit of around £54,000 so you are earning £4,000 more for only 90% of the work. Possible even less work because the price sensitive clients are usually those who are most demanding and often a pain to deal with.
• In this example you can afford to lose up to 16% of your clients and still make slightly more profit
• 84 clients paying £1,100 gives turnover of £92,400 and profit of £50,400 ie £400 more than at the start but for 84% of the work
Last week I talked about WHY you need to increase your prices but, less talked about is HOW you go about doing it.
It’s a lot easier to talk about in theory than it is to do in practice.
- Work out what your prices should be. If you need to provide quotes then work out what your method of calculations will be.
- Recalculate up to date prices for all your clients.
- Consider using pricing software which provides confidence to both buyer and seller that this is the right price.
- Start by increasing prices for new clients
- Email/write to all clients with the new price. If you have not done regular price increases before then you may need to explain that this is due to catching up an several years and reassure them that you will not leave it so long in future. Keep your explanations brief.
- Telephone any clients who need extra TLC or if a change in scope means that the increase needs further explanation
- Resist discounting. You worked out your prices in (1) above.
- Practice telling client your new prices. If you’re an introvert who hates role play then just rehearse in front of a mirror:
“Our new prices are …”
“We do not offer discounts”
Also prepare responses to any other potential objections so that you don’t need to think on your feet quite so much.
A lot of business owners avoid increasing their prices, either because they’re worried about losing clients or because they don’t know how to go about it. Even when they know that they need to increase their prices it is too easy to procrastinate (I’m the queen of procrastination, I have all the excuses)
I’ll cover the ‘how’ in separate tips but today I want to talk about why.
We all started our business for a reason which broadly come into one of three areas:
• Build something valuable to sell at retirement
• Better work – life balance
All of these will benefit from having better prices allowing you to earn more money, increase the value of your business, or to earn more in limited time.
But the real benefit to our clients is that we will have time to provide a quality service. To do things properly and not cut corners. And to run a business that will still be around to help them in future years.
When we provide a quality service our clients benefit, they stay with us, and they refer other people to us. It’s a virtuous circle because everybody wins.
To create the business you want you need to charge the right prices.
Welcome to the new year. What have you got planned? Incremental business growth, a better work life balance (how long have you been promising yourself that?) or world domination?
Now is a good time to think about what you want and what that means for your business.
Here are some questions to get you underway with your plan:
1. What do you want your life to look like in 5 years time?
2. How much do you want to earn from your business?
3. How much do you need to earn from your business?
4. How many hours per week/month/year do you want to work in your business?
This will give you some idea of how much you need to earn per hour in your business. Don’t forget that you will need to cover your business costs and taxes too.
A good SWOT analysis will help you to decide how to earn the necessary profit. Look at your strengths, your weaknesses, and any opportunities and threats around you. Covid and potential lockdowns can provide both opportunities and threats to your business to make a plan to eliminate or buffer the formers and to be able to take advantage of the latter.
Take a close look at what you are actually doing. What will you sell and to whom? What problems do you solve?
Now you can start on the details of the plan:
1. Sales plan
2. Marketing plan
3. Staffing – who, when and at what level
4. Technology and other resources
6. Other costs
If you need a hand with any of this then we’re running a Strategic Planning Day on 19 January. We’ll work through templates together to help you come up with your own plan for your best year yet. Email us to sign up.
Whilst I would encourage people to value price where possible it is often more practical to quote fixed prices.
Here are some of the things to consider when setting your prices for services:
- How long will it take?
- How complex is it?
- Does it need any particular expertise? And do you need to pay extra for this?
- How much does it cost in terms of hourly salaries?
- Can you use software to speed up the work?
- Are there other costs?
- How easy is the client is to work with? eg clear specification, providing information promptly, approving promptly and paying on time
- What is the acquisition cost? (Time and money spent on marketing)
- What proportion of overheads should be included in the fee?
With new clients there maybe a lot of unknowns and they may also take time to set up contracts, software, direct debits etc as well as more general familiarisation. These set up costs need to be covered too.
When I started up each of my businesses I had a dream. Not a huge, Martin Luther King type of dream that would change the world, but a smaller dream of helping business owners while having a decent work-life balance for myself.
I wrote down my vision in one sentence. Nothing complex but just to remind me.
And each time I had to make a big decision I came back to my dream to see whether this particular decision would move me closer to my dream.
But often we make a lot of smaller decisions that mean that our business drifts away from that dream and we just end up with a job that we have to do in order to pay the bills. When I work with clients on our individual or group coaching programmes I encourage then to recapture that dream but also to take actions.
Here are some of the actions that you can take:
- Review your pricing to ensure that you are being paid what you are worth
- Review your clients to ensure that you are selling to the right people profitably and enjoyably
- Review the type of work that you are doing to ensure that you are doing profitable AND enjoyable work
- Review your marketing to ensure that it is all aimed at getting more of the right people and the right work
- Review how you are spending your time to see if there are things that would be better off delegated or outsourced. How many small business owners are trying to do their accounts at the end of a long week? And how many accountants are doing their own graphic design?
You may prefer to do this on your own but, if you want some accountability, then come along to our monthly Flyby sessions (see below). If you would like more proactive input or specific advice from me then try our coaching programmes.
You spend ages working out the right prices for your business and then somebody asks for a discount!
Before saying yes you need to work out what you get in return. If it’s a discount simply for signing the contract or buying your goods then there is no additional benefit to you.
If they’re buying in bulk then you need to decide whether this will benefit you in the long term. Will they buy more overall or is it just a cashflow benefit? Perhaps they’ll ask for a discount in return for earlier payment which could be useful if you’re short of cash but interest rates are generally fairly low at the moment.
The trouble with discounts is that they become the norm. The individual customer expects them every time and it is hard to increase your prices. You also get into a habit of agreeing to discounts and gradually erode all your careful pricing.
There are very few exceptions when it is appropriate to discount and so you need to be clear what’s in it for you and what you will get in return. Work out your prices and stick to them.
(We discuss pricing more on each of our courses as it is key to a profitable and sustainable business)