Growth

11 ways to increase prices and earn higher profits

Ben Yi
Industry Expert

Ben Yi is the Business Development Manager at muru-D, the startup accelerator backed by Telstra. Ben is known as a Pricing and analytics Expert

Ben Yi
Industry Expert

Ben Yi is the Business Development Manager at muru-D, the startup accelerator backed by Telstra. Ben is known as a Pricing and analytics Expert

You’ve launched your business, customers are happy with the product and your user base is growing. Pricing expert at muru-D, Ben Yi, explores a few ways you can now look at pricing.

There's just one problem. How do you grow? You're already trying every trick in the book to acquire customers. What's worse is that the growth in your customer base isn't doing anything to grow your profit margin or cash flow.

If you're like most startups, chances are you’ve left pricing strategies as the last things to worry about. Or you've assumed that your costs will stay low forever. Perhaps your business is doing well, but you're looking for a higher valuation. Whatever the reason may be, you've discovered that you need to grow revenue per customer. You need to raise prices. But how? Well, here are a few tips that will help you achieve your goal without alienating your customers.

A selection of colourful blocks laid out like graphs on a pick table

1. Just change them

If you're a startup, chances are no one will even notice a change in your pricing strategy. If you've been pricing your product too low since inception, you might even be pricing the product in the ‘too cheap to be any good’ category. Most consumers come to the conclusion that if something is too cheap it's probably junk. No business wants to be in that category. In this respect, changing your pricing strategy could actually increase sales rather than affect them in a negative way.

If you're selling a service (especially on a commission-based model), changing prices can be highly visible. In this case, it's very important to communicate the value of your services. Make your customers realise what life would look like without you. Crucially, tell them how you're planning to make your service or services even better by using the higher price point to invest in the product.

A Seattle-based B2B referral company recently raised their commission by as much as 40 per cent. Prior to the price change they spent significant time and effort in training their sales team on how to communicate the value of the company and their service. The result? Very few customers churned, and the sales team improved their value pitch. As a result, the team became much more effective at closing deals.

2. Reduce discounts

Many businesses, particularly those in retail, use big sales to push for volume. While sales are part of the business cycle and are very effective at driving volume, most of the time the true driver for the increased volume comes from more prominent advertising. So instead of heavy discounts, do a more moderate discount and complement this with good advertising.

3. Less frequent discounts

Similar to reducing the depth of discounts, reducing the frequency of discounts will give you the same net result. Again, use advertising wisely to complement any sale activities.

One thing to remember is that holding big sales is a double-edged sword. If you do so too frequently you will train customers to only shop on sales. If a business has sales all the time to the point that customers just expect to never pay full price, they effectively can't stop the sales without seriously risking volume.

4. Add high value products

Stocking a high value product can help your business in a couple of ways. Of course, a high value product means a premium pricing strategy, but stocking a big name can also help you acquire more customers.

Firstly, that new price point (accompanied with more features) allows you to access a broader customer segment. There are also existing customers who have higher requirements, and this is a great opportunity to serve those needs and extract more value. It can also work to create a higher quality image for your brand.

The second, and perhaps the more important reason is that stocking a high-value product creates a higher reference point for your products. When facing choices, most consumers choose the middle price point (three-tiered pricing works particularly well). This is particularly true when customers encounter a product they are not familiar with. By adding a premium product on top, you allow the next highest priced item to no longer be the most expensive thing on the menu – removing that psychological barrier that might have been there in the first instance.

But a high pricing strategy for new products does not always mean a high margin – be careful to craft the right amount of value and features in your product sets so that you optimise on overall margin.

5. Remove low-tier products

This usually works best when there are already several choices available. If your product is popular, removing the lowest-priced product will move customers to higher-priced products. Be careful to not make the jump too radical or you'll risk losing many customers at once. One way to mitigate that might be to place the lower-tier products in less prominent locations. This way, your price-sensitive customers can still find them but they won’t be as easily accessible to new customers or those less familiar with the brand.

6. Make high price items more visible

If you have products at multiple price points, making one of them more prominent will send more traffic towards that product straight away. This is why supermarkets always put the most expensive items at eye level. Couple that with tags on your ‘most popular’ and ‘best value’ products to help boost volume.

Be careful that you highlight the most profitable item, otherwise you could receive the opposite effect to your margin. 

7. Reduce content

Ever complained that the potato chips have shrunk? This is another way to raise prices: by reducing features or reducing size per unit. Although not explicitly changing the price tag, you have raised the per unit price point nevertheless.

8. Give a little, take a little

An even smarter way of accomplishing content reduction is this ‘give a little and take a little’ technique. While reducing the content of a product, simultaneously reduce the price point – but by a lesser amount. This will raise the average price per unit. You can also try the reverse. Raise prices and content at the same time to achieve the same effects.

9. Add on

Perhaps the most popular expression in McDonald's playbook is, ‘Would you like fries with that?’. Selling add-ons or tag-ons can be an effective way of increasing spend per customer. This practice is used widely in all industries. For example, retailers sell extended warranties and banks sell credit cards when you open a cheque account. Sometimes these features can be built into the features of a higher-tier product, or alternatively you can offer customers product bundles. 

10. Extra fees

Warning: use this very carefully. It could lead to consumer backlash.

A very popular way to increase revenue is to add fees on top. Airlines are the most notorious at doing this. Booking fees, fuel surcharge, credit card processing fees, administration fees, airport taxes, pollution taxes, noise taxes. The list goes on. These are, after all, the cost of doing business. But wouldn't it make sense just to build that into the cost of product? Why do businesses make them separate line items?

The main reason is to display a lower headline price, so the item appears cheaper than its true price. Another reason is that once one company starts advertising prices this way it puts pressure on all companies to act that way, so that their prices don't appear ridiculously out of market.

My take on this is that regardless of market price, it's much better to build everything into a single price tag. Consumers don't like being surprised with a second price tag – they feel they are being nickel-and-dimed, and this could have a strong negative effect on your sales. One of the eCommerce startups I work with found out that they could raise price tags by as much as 25 per cent  without any impact to their sales volume; however when they tried to add a delivery fee (worth about 5 per cent of the overall product value), the volume dropped significantly.

Conclusion: use it with caution. Experiment and adjust quickly if it does not produce the desired effects.

11. Automatic inflationary adjustment

This is a special case of #10, and applies mostly to recurring revenue stream (that could be a subscription or a recurring pay-as-you-go payment, such as an electricity bill). In your contract, you may wish to include a clause that automatically adjusts price upwards by inflation on annual basis. If you do so, it's easier done on products that do not have very memorable price points. For example, a two per cent increase on a bill of $34.68 is not very noticeable, but the same two per cent increase on a $30 monthly bill draws more attention.

The downside to this is that you have effectively put a cap on how much you can raise your price by. If you're in an industry where costs are rising faster than inflation, I would suggest not trying this approach. Similarly, if your costs are unrelated to inflation, then it's difficult to justify these kinds of increases with your customer.

Higher prices = Higher profits?

Just a reminder that higher prices do not always mean higher profits. The other side of the profit equation is costs. When crafting your strategy to increase prices, make sure you balance the revenue against cost to build and serve these new products or features. Ultimately, your goal is to increase profits and net cashflow, so don't get sidetracked by only revenue growth or customer acquisition.

Are you looking for more expert advice to make the most of your business?

Read our guide to better business plans with muru-D.

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Disclaimer

The information provided in this article is the view of Ben Yi, pricing expert at muru-D, and not Telstra Corporation. It is not a substitute for professional advice and we recommend you seek your own independent professional advice before making any purchase/finance decisions

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