Are You Leaving Money on the Table? A Guide to Value-Based Pricing Strategies
Breaking News: Now’s the time to raise your prices!
And it’s not just because we’re at the top of a new year (though it is, generally speaking, a good time to rollout changes in pricing structures with your customers).
No. We’re saying it’s time to raise prices because in this economy, your livelihood depends on it.
Inflation is the highest it’s been since the 1970s. For many in the workforce, it’s the highest they’ve ever experienced in their adult lives! Everything is going up.
As a result, the tolerance for price changes is high — your clients simply expect to pay more these days.
“Be proactive and not reactive right now about raising your price,” says MACKEY’s Director of Client Engagement Adam Reynolds. “Pricing is the most powerful tool in a business’s toolbox — so use it.”
Here’s the deal: A ripple effect is in motion. As your suppliers pass their increased costs on to you, you need to be doing the same with your customers. If not, you’ll hinder your success in the long-term. While inflation may slow, prices won’t go back down unless there’s a significant market correction — a scenario that’s possible, but unlikely.
So, what are the indicators that your prices are too low? And what are the common pitfalls we see with pricing?
Don’t worry. We’ve got you covered.
Am I Leaving Money on the Table?
We’re going to go out on a limb and say probably, yes, you are.
That’s because most businesses are undercharging for their products or services. It’s a painful truth for us financial coaches to tell clients. But we repeatedly see four main culprits of underpricing:
1. Companies are stuck in ‘Founder Scarcity Syndrome’
Remember those early days when you were a solopreneur living the grind and hustling day-in and day-out to get your business rolling. (Yeah, we blocked out that part of the journey, too.)
In the early stages, most founders are just trying to keep the lights on. You’re simply happy to close a deal — any deal.
You know your pricing will likely need to change as you gain experience, but you put it towards the bottom of your to-do list as you focus on more pressing issues like how to figure out your estimated quarterly taxes and how the heck to get your office computer to actually (for once in your life) just print the damn document.
You’ve survived the early-stage hurdles. Your dream of being an entrepreneur is realized. But what comes with that is a slew of other, more urgent tasks: billing, collecting AR, sales, and marketing, growing your team, paying your bills, finding the right vendors and partners. The list goes on and on. The need to revisit your pricing is the last thing on your mind.
2. Leaders aren’t accounting for their team’s appreciation in value
Leaders don’t often consider the reality that their team’s value increases as their experience grows. It’s an issue especially common in service-based companies.
We give our employees annual raises, but we don’t also increase our rates. The numbers just don’t add up. To increase your team’s pay without also upping your prices means you’re actually creating more work for your team (especially those in sales). You’ve upped your expenses, without accounting for revenue. Now your sales team is hustling to make up for the gap.
Sarah Grace Mohr, MACKEY’s COO says, “When you aren’t honoring the appreciation in value of yourself and your team, you’re failing your business and your employees.”
3. Pricing strategies aren’t reviewed frequently enough
Most companies aren’t regularly evaluating their price points.
We even worked with a client who hadn’t changed their pricing and discount structure in over thirty years of business.
Pricing analysis should be part of your annual review. And product-based companies should be assessing even more frequently — every three to six months depending on your industry.
4. Leaders are blaming the wrong performance indicators for their financial problems
If you’re not meeting your quarterly, annual or long-term financial goals, there are four primary areas that could be contributing to your stalled growth. We call them the 4 Ps: price, product, process, and people.
Many leaders are quick to jump to people as the source of their problems, but at MACKEY we prescribe to the Deming Philosophy.
We believe that the vast majority of people want to do well at work and if they fail it’s often because they’re lacking the right leadership or resources.
And while your products and processes may need revamping, those changes take time and money. To fix these issues, you need cash flow. And the easiest way to get cash flow is to up your prices.
Think of it this way: “If we assume that you’re spending the same amount of money every time you perform a service and you raise your prices by 5%, that 5% falls straight down to your bottom line,” explains Adam.
Boom. Instant increase in cash flow. Which means if you do have other problems within your business, you now have the funds to fix them.
Pricing is the only one of the 4 Ps that can be changed overnight. Sarah Grace likes to think of it in terms of your impact barrier matrix: “Changing your prices gives you the highest impact with the least amount of effort.”
Where Did I Go Wrong?
Business leaders often possess certain fallacies about setting price points. Let us elaborate:
A cost-plus mindset
We almost always advise our clients to pursue value-based pricing, but most come to us with a cost-plus approach. Yes, you should know your costs, but it shouldn’t be the basis of your pricing. Unless you’re in a few select industries, the model doesn’t work.
Instead, think about value. What benefits do your customers receive? And how much is that worth (to them, not to you)?
“The cost-plus approach is extremely limiting,” explains Adam, “because you can never exceed your formula. So, while you can scale, you can’t multiply the scaling of your business. You’re putting yourself in a box.”
An obsession with the competition
Comparison isn’t just the thief of joy; it can also be the thief of your bottom line. A lot of people go to industry data, which is useful, but it shouldn’t be your goal.
The data industry is an average. Do you really want to be average?
The knee jerk reaction to meet or beat your competitor’s price points is only the solution if you have a mediocre or subpar product. But if you provide a better service than your competitors, of course you’ll cost more. Premium products come with premium prices.
A narrow understanding of the data
Data is important. Heck, we live and breathe data at MACKEY. But it can also be misleading.
Even when we’re diligent about tracking our time, most employees underestimate the amount of time they spend on tasks.
As a result, the effort that goes into your business and how that effort surfaces in your data are often skewed.
Professional growth is also hard to quantify. Often owners and your c-suite spend a lot of time focused on strategic work and development that adds value to customer experiences. But the time, energy, and effort that goes into those initiatives is rarely reflected in the baseline expenses that are used as a launch point for price setting.
An overreliance on perfection
No one likes to be rejected. But here’s the thing: perfection might be your problem.
“If you’re closing 100% of your proposals, your prices are probably too low,” warns Adam.
Sarah Grace takes it a step further: “If a prospective client says, ‘yes’ to you instantaneously, you’re probably also priced too low.”
Both are indicators that you’re coming in under a client’s budget. To find your price point sweet spot, you will inevitably miss out on closing some of your sales calls.
Let’s run a simple model to understand:
You charge $1,000 for your services. If you pitch to 10 customers and close all 10 deals, you’ve earned $10,000.
10 out of 10. A+, a perfect score. Congratulations!
Now let’s raise your prices by 25% and start charging $1,250. This time when you pitch, you only close 8 of 10 leads.
8 out of 10. You earned a B-. Womp, womp.
But wait. Let’s do the math. At your new price point you still earned $10,000, but you have less clients to support and less services to provide. You’re earning the same amount of money, but for less work. Yes, you got rejected, but maybe that’s not such a bad thing after all.
We think it’s OK to be rejected from time to time. In fact, you probably want to be rejected.
Setting your price points isn’t something you’re going to change with the flip of a switch. It’s something you refine over time — tweaking and adjusting as you go. With time, testing, feedback, and data analysis you’ll find an ideal close ratio that maximizes your profits while minimizing your efforts.
OK. I’m Buying In. But I’m Also Pretty Terrified.
Selling your products and services can often feel like you’re selling yourself. It requires self-worth and self-confidence.
Our wise Founder, Mackey McNeill believes that the very first question business leaders should ask themselves when analyzing prices is this: “What should I be making in return for the risk and effort that I’m putting into this business?”
You work hard. You provide a premium product or service to your customers. You’re worth it.
We think you deserve a decent return. Don’t you?
