When times are tough, and the pressure is on to perform, the instinct for a lot of businesses unfamiliar with the 7 Levers of Business, may be to drop your pants and discount, price check to undercut the competition, or just promote through price and price alone. Yet these are often the last things businesses should be doing.
As we talk about a lot here, there are 7 key drivers of profit for a business, with pricing being just one. In fact if you drop your prices by 10%, you better hope it increases your conversion rate by 12% – as that is what it takes to just keep at the same gross profit position!
So why is price such a focus point for business owners?
For a lot of people, increasing prices, even just by 10% in line with the 7 Levers, can be a hard psychological battle as well – and thus, is often the last lever they are willing to tackle.
Well, this short excerpt from Pricing for Profit: How to Develop a Powerful Pricing Strategy for Your Business demonstrates a fantastic case study on exploring how presentation of pricing affects buying decisions.
The entire book by Peter Hill is full of similar frameworks and ways to increase prices, without losing business, so make sure you check it out.
The No Rain Guarantee…
Coastline Vistas Limited (CVL), owned and let holiday homes. The business had been stable for some years, but struggled to make a decent profit simply because of the costs of running the business. They could have run 100 homes with the same infrastructure and personnel and would then have made a good profit, but they only had 40 homes and hence it was hard to massively increase revenues as a route to increasing profits. These properties seemed to be worth more than the owners currently had the confidence to charge. Indeed you could have rented one of their luxury four-bed homes with state-of-the-art TVs and fully fitted kitchens, etc for the same price as a caravan on a holiday park.
A price increase of £100 per week on each one was suggested. This was based on research of comparable accommodation in the same area. The client was understandably concerned as the nature of holiday rentals means that if you set prices too high or too low, then you are stuck with these for the whole season. Too high and you get no lettings; too low and you are busy fools for four months with no profit at the end.
What I suggested was that we add the £100 to the price of each week’s holiday, but with a special Summer Sun Guarantee. The offer was:
If it rains for more than half your holiday, then you will get £100 cash back to contribute towards the cost of indoor activities, since you would be unable to enjoy the countryside or the beaches for free.
There was an incredible amount of debate about rain-monitoring systems and when refunds would be triggered, but that was immaterial. If it rained, they were only giving back this additional £100 that they would not have otherwise had. No competitors offered this guarantee.
The purpose of the exercise was to test the customers’ reaction to the higher prices, in order that the client might gain the confidence to hold or even increase these prices in the next and subsequent years. It was all about testing the market and exploring how presentation of pricing affects buying decisions.
The running costs of the business were unaffected by the price change. It is possible that they lost a few customers where the headline price now appeared too high, and with people who didn’t see value in the guarantee; but it is equally possible that they gained a few who loved the idea, which many told us.
The only important question is whether they made any more money as a result. In that year the turnover increased by £50k from letting the properties at an extra £100 per week over the summer. From this we then needed to deduct the amounts given back under guarantee.
So how much did we give back? Nothing at all. Fortunately, the weather was great, and no one asked for refunds. The business made £50k more profit, doubling what it would have made without this price change.
You may be reading this thinking that it has no relationship to your own business either in scale or in the industry you work in. The point is much simpler than that. The fresh perspective on their business, looking at it as a profit-making machine, considered a number of ideas to improve the results. Despite resistance to the changes, this course of action more than doubled the results of the previous year. Could they, or would they, have come up with this idea on their own, and would they have had the courage to try it without external pressure? No.
When you read on through the book, Pricing for Profit: How to Develop a Powerful Pricing Strategy for Your Business, I guarantee that there will be other simple ideas and actions you could take that may well have the same impact on your business, but if you only see the reasons not to have a go, then you won’t make a penny more.