We see the following scenario a lot:
- An entrepreneur opens for business and then decides to charge slightly less than their competitors, but providing a much better product or service.
- By the end of their first year in business there isn’t enough money to pay for tax, GST or themselves
In this scenario we need to take a look at the pricing levels needed to be achieved for the business to remain profitable. Raising prices has an immediate impact on your bottom line, as the same service is provided incurring the same costs:
Lets take a look at a simple financial scenario:
And we increase prices by 5%:
Costs: Same - $90
In this scenario, profit has increased by 50% following on from a 5% increase in prices.
But how do businesses change prices without putting current customers offside? We have three methods for startups to try:
Breaking down what you provide to customers can show you services you aren’t charging for. These services provide value for your customers which gives you a link to increase pricing linking to value. This exercise also allows you to offer different service levels to customers wanting various services.
Only Change for New Customers
This method of segmentation means that your pricing changes will take longer to come into full effect. However because you’ll be testing prices on a small sample size, this can be helpful to determine whether new pricing will be successful for older customers too.
This is very popular with SaaS businesses and basically is giving a long period of notice of an increase in price to current customers. An extended period (say 3-6 months) gives clients enough time to assess the market before having to fork out higher prices.
Once startups accept that not all customers will be impressed by changing prices, it makes it much easier to change them. In an unprofitable business the alternative is usually far worse.
Have other methods that have worked really well? Please send us an to firstname.lastname@example.org or get in touch