“There will always be a yin and yang to your business’s structure and process. Dedicate yourself to the on-going commitment of finding the happy medium for both you and your customers.”
Pricing is and should always be a challenge for every business owner. We’d like to believe that eventually some processes get easier with time, but I do not believe we do benefit the customer or our bottom line if we do not continually reassess our pricing, service offerings, customer retention and attrition rates, and more.
Whether you are adopting a time-based pricing methodology or moving more towards value-based pricing, it is often a difficult to appease both the business and the customer equally. Often there is a compromise. This carries over to your costs and how you price your products and services as well. For new business owners, they might find that a customer is extremely pleased with prices which may signify that you are not charging enough and therefore, hurting the business’s profitability or potential for future growth.
“Not charging enough…” to some, this may sound like padding your costs or trying to squeeze customers for every dime possible and sometimes for more than you need to.
If you feel this way, I get it… I really do, but here are two key points to consider:
#1 Sustaining and Improving a Business Requires Positive Cash Flow
Even if money and profit is not your motivating factors for owning a business there are reasons you started your business outside of money (I really hope that’s true). For example, delivering solutions which help solve problems, assisting customers in tackling a bigger personal or business issue, or even simply providing goods and services consumers need all serve a greater good.
Most business owners took interest in a particular topic, problem, skill, issue, or hobby and eventually established a business based on their own interest or passion they wanted to share with others. Therefore, my question is,
Without making your best effort to increase your revenue and cash flow, how would you possibly be able to continue satisfying your customers?
Assuming what I said above is true, in regards to undercharging your customers… How long is that sustainable?
As the costs of doing business, labor costs, material costs, and an expanding global economy increasingly affect your bottom-line, you should only assume that your pricing should increase in step as well. Back in Pricing Concept #3 I spoke about how we’ve been using Freshbooks since 2009 for our accounting and invoicing for my marketing agency. Our cost in six years for using their service has never increased. To me, the pricing model is flawed as you are in a constant state of finding new customers just to maintain some level of revenue. The cost paid in 2009 seemed much more significant than it does now, only a short six years later due to inflation, increased cost of living, and the fact our need for more and more cloud-based services has made this minimal expense seem tiny by comparison.
While this warning is true and is a lesson for all businesses who hope to find a “pricing sweetspot” that doesn’t necessarily change often, consider that Freshbooks solved this very issue by giving customers a ton of great options and additional service add-ons which hold a great deal of value.
For example, in the last two years, Freshbooks has integrated their own credit card processing platform directly into their cloud-based platform. Therefore, we no longer have to utilize 3rd party payment processors such as PayPal, Stripe, Authorize.net, etc. They have not only simplified the process of getting invoices paid for our customers, but they’ve also helped us save lot of money by no longer needing any other payment integrations or payment processing services to offer secure credit card payments from clients. Our customers also like the fact that all payments are made in one place on one secure platform which increases their comfort level with electronic payments.
In addition, over the past six months or so they also integrated cash advances on certain invoices which are outstanding in your account. For a business like ours that typically has some kind of payment structure where each payment pushes us closer to the finish line, having the option to access one of those payments sooner than later may be very useful at some point down the road as project cash flow can be necessary to purchase certain assets during a large project.
Freshbooks is now generating multiple income streams and adding massive value all on one affordable platform. Now, the monthly subscription fee they collect is a mere drop in the bucket compared to what they collect in credit card fees from us monthly.
Is there a lesson to be learned here? Absolutely! Several in fact. First, if you want to set fixed pricing, find more ways to add value to your relationship with your customers. Second, learn to evolve and think beyond your current product or service.
As in Freshbooks’ case, by expanding their platform to cover payment processing and affordable working capital loan’s as well as building a user base of over 5 million people, they have been massively successful and have truly become a lifeline for our business to record revenue and expenses, measure and sustain profitability, collect payments, and increase cash flow at a moment’s notice.
“Consumers, competitors, your needs and offerings as a business, as well as the economy change, so should your pricing.”
#2 Customers Will Not Pay for the Status Quo Forever
Unless you sell a product or service which is better left untouched or unchanging, consider that customers buy from you because you understand their needs and provide solutions that work for them.
And what product today remains unchanged anyways?
Perhaps if you are a sculptor, potter, or some type of artisan, then creating goods the “old fashioned way” actually becomes more appealing to consumers and increases the value of your craft and whatever output it generates.
Or, perhaps your product is purchased only once, and repeat customers are few and far between. In these cases, justifying cost or proving on-going value may not be a concern.
For the rest of us, as consumer’s interests and tastes evolve… as technology shifts… and as competitors find new ways to market or appeal to your buyers, it’s probably a good idea for you get with the program too.
If I were still developing websites as if it were 2000 would I have a single customer? Definitely not.
While the argument that customers are not going to stand around for the same old thing forever holds true, pricing is another challenge altogether.
“Customers expect more, but do not expect to have to pay more to get it.”
How can we get around this issue?
The market you are in will ultimately define how your consumers perceive both quality and value.
Often price is used to assess quality and buyers make the assumption the higher the price the better the product. However, existing customers who make on-going payments or renew services at a set interval, pose a unique challenge because in their case, value and price are two very different mindsets.
Customers may have chosen your company because of the quality perceived by the price, but over time, they have stuck with your product or service because it has provided value. Will that continue to be the case if it never changes?
There are many ways to increase perceived value without actually adding to your costs or eating into profit.
Some simple ways to adjust your customer’s mindset might be:
- Rebrand your product or service to appeal more to your target audience – is your product outdated? Do you want to attract a younger audience? Find a way to make it young too.
- Change how you position your product – if you advertise an annual price which seems high, try changing the language to make it more appealing. $365 per year versus only $1 per day sounds way different.
- Remove pricing as a key selling point – Find ways to position your product or service around the value it adds rather than what it costs. For example, I often reiterate to customers that a website is not an expense, it is an investment in the virtual presence of your company. Putting a price on how your company is perceived versus telling someone they need to spend $10k on a website completely changes that discussion.
- Raise the price – if the premise that customers perceive value or quality based on what they pay, consider raising your prices. If your product has improved over time or there are tangible reasons your solution is better than the competition these both add value and warrant asking more from even existing customers. So long as your price increase is reasonable, you’ll be pleasantly surprised how many customers remain loyal to your brand.
- Find a way to convey a shortage or limited window to purchase – even with existing customers, you can promote offers or discounts to boost retention. For example, some businesses in an attempt to increase monthly prices will move from a monthly payment structure to an annual pricing structure, and for a limited time offer a discounted price for the annual payment. This way customers paying annually can still pay the same per month, only all at once, versus those who choose to stay monthly will see a price increase.
What’s the point to all this?
Customers will not pay for the same old service forever and you cannot maintain let alone improve your business long-term without positive cash flow. Not charging enough will ultimately lead to cash flow issues, and delivering the same service indefinitely or never improving a product, will mean you do not even have the option to charge more, even if you want to.
Suggestions to Maintain Effective Pricing Long-term
Be vigilant and check pricing against your competitors as often as you can. I recommend monthly price checking in most markets to make sure you are staying competitive. When I first started my agency I went several years without even thinking about raising prices. I was just happy that I actually had customers and was not looking at what I was charging or how that translated into profits. I was, after all, a solopreneur so every dollar the customer paid I saw as profit (I had yet to assess the value of my time or the opportunity cost associated with how I spent it).
“Pricing for us today is an evolutionary process, always in flux, and never perfected.”
Pricing creative and strategic services should not be fixed. In our industry the level of engagement and time investment per project varies greatly. We monitor not only our pricing and our competitors but also the value our products have to customers as well as if their needs have changed.
In addition to what you charge, keep an eye on why you need to charge a certain price. The costs of delivering your solution(s) to customers should directly correlate with the price they pay. If your costs increase in order to deliver the same service, you must find a way to lower costs elsewhere or find ways to deliver move value either actual or perceived.
If I can leave you with three pieces of advice:
#1 Do Not Lower Standards to Match Growing Costs
Customers today are far too savvy, too empowered, and often have many other options to choose from. If you mislead buyers or deliver a sub-standard product your customers will hold you accountable. Online reviews are massive for businesses of all sizes. Even one bad review, could hurt your business for a long time if your typical buyer puts service providers through a vetting process. Delighting customers today requires a great deal of engagement and building a business to customer relationship.
#2 Find Way to Reach Consumers Earlier in Their Buyer’s Journey
Consumers today have a massive amount of information readily available for just about any product or service they are looking to buy. They do not need to rely on the vendor alone to provide this information and it is easy to thoroughly research all available options before ever even reaching out.
This is actually why selling today has become so problematic for businesses. The way consumers buy has changed, but often the way we sell has not. You must find ways to get in front of prospective customers earlier. Think about ways you could develop thought provoking or engaging content that could be published on your site or shared across social networks to your target audience. If content is positioned properly and targeting the right prospects at the right point in the buying cycle, this value-added information will increase your business’s reputation and credibility which will lead more of them back to your door when it is time to buy.
#3 Be Transparent
My final bit of advice, be transparent. Your customer may not need to know your profit margin or what you pay a contractor or materials on a project, but you should be able to share with them the type of costs you incur, the time and effort involved with the project, and any additional information that helps articulate the value for your end product.
I hope you’ve enjoyed this eight part series on small business pricing. With the insight provided in all 7 pricing concept articles you should be able to develop a pricing strategy that helps your business thrive in any market.
This article is part of a 7 part series I’ve put together to help you effectively price small business services:
- Getting Rid of Limiting Beliefs About Money
- Creating a True Cost Analysis of Your Business
- Avoiding the Pricing Push (overpricing)
- Avoiding the Pull to Cheapen Your Worth (underpricing)
- Pros and Cons of Time-Based Pricing
- Pros and Cons of Value-Based Pricing
- Monitoring & Grow While Maintaining Pricing
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