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Home » Run Your Business

Why Pricing Is Important

Bob Barker
Creative Commons License photo credit: fireballk2588

Most business owners recognise that if they price their products or services too low, then they risk leaving money on the table. On the other hand if they set prices too high, then they run the risk that no one will want to buy them and they risk loosing customers.

In this post we look at why it’s important to get the price right for your products or services.

The challenge therefore that business owners face is to lose profits or lose customers.

So balancing pricing against demand can be a valuable advantage to your business.

The 1% rule

So, how valuable is it to get pricing right?  The answer: Very valuable.

A 1% price increase has a 50% greater impact on operating profit than a 1% decrease in your variable costs.

More importantly, a 1% increase in price has a 215% greater impact on operating profit than a 1% sales volume increase.

That’s what we call the 1% rule.

Most people think that in a recession that you can’t charge more for your product or service, so let’s see how you could charge more, even in competitive markets:

Increasing your prices

If you’re operating in a competitive market then it may not always be possible to increase your prices, especially if you’re selling a commodity product.   But think about supermarkets, rarely are they the cheapest on every single item. They focus price reductions/offers on some products to create the illusion that everything is cheaper.

Not many people always buy commodity products from the cheapest source.  People make prucahsing decisons on a variety of factors, which could be the convenience of the store, the product range, friendliness of staff or becuase the supermarket offers free delivery. There are 100’s of different reasons.

Even in competitive markets, if you can find a way to increase the prices of your product or service without increasing costs, through say:

  • more focused marketing
  • improving product range or image
  • providing increased value
  • finding new niches or customers
  • Improved staff training

Then the impact on your bottom line will be so great that a corresponding reduction in costsor increases in sales volumes will be able to match it.

So, what are you doing about increasing your prices?

5 Comments »

  • BizSugar.com said:

    why you should increase prices…

    Discover why you should spend time increasing your prices and even the benefit of a 1% increase. Most business owners recognise that if they price their products or services too low, then they risk leaving money on the table. On the other hand if they …

  • Steve@Internet Lifestyle said:

    Some great points on pricing. It is easy to think that (specifically in the “digital” world) that you always need to be the lowest price to succeed.

    While price is a factor, if the prices are reasonable it is only that… A factor.

    Love the 1% rule. You give a great explanation!

  • Matthew Needham said:

    Thanks for the feedback Steve. You’re right, pricing is just a factor in any product. If people want your product then they’ll buy it regardless of price or the state of the economy. I’m thinking iPad 2.0 here. Until 18mths or so ago, no one needed an iPad. Now a lot of people traded in their iPad for an iPad 2. It’s neither cheap or needed (there are alternatives). But that doesn’t stop people wanting one.

    Just think how much 1% would have added to the bottom line across all those units sold!

  • Brandon@Local Search Marketing said:

    This is not always the case for every industry. While in most cases, it is, industries like seo have huge price differences. The thing is that you get what you pay for, and consumers know that. Sometimes it’s better to pay the higher price if you know that the quality is there.

  • Matthew Needham said:

    Brandon, thanks for the comment. Clearly other things come into play like reputation and experience, which is just as true in any business. Sometimes location can be helpful too. For example a number of UK based firms have outsourced customer support services to India, whereas in the US customer support is often outsourced to the Philipines due to the use of “American English”. From a charging customers perspective you need to differentiate your services on quality and performance, not just price. There’s an advert in the UK for Stella Artois beer with the tag line “reassuringly expensive”.