Why Raising Your Prices Won’t Kill Your Business
Ever heard that before? I think consumers are born with this phrase engraved into their brains. No matter what business you are in, people will always tell you that your prices are high. I’ve almost never heard, “Wow! Your prices are very cheap.” Have you? If you have, raise them now, and then keep reading this post.
I was recently talking to a friend of mine who runs a great painting business in the Chicago area. He was having a friendly conversation with one of his competitors who told him what he was bidding his paint jobs at: $32 an hour. My friend asked what he was paying his painters. The top painter was getting $25 an hour and the lowest paid guy $17. After a minute my friend said, “You aren’t making any money are you?” The competitor said that on the highest paid employee, he doesn’t make a penny, and he earns around $7 an hour on the lowest paid person. That means he is running a business making little or no profit. Does he really want all the stress of running a business (i.e. overhead, trucks, gas, payroll, worker’s comp, OSHA, scheduling and a hundred other management tasks) when he is not making money? But he had been told by potential customers that his prices are high and that his main competitors are charging even less!
So what is a small business owner to do? Raise the price!
Another Lesson from my Dad
Most of what I’ve learned in the business world is from growing up in a small-business family. My dad is my role model. He’s always done an incredible job running his painting company. He’s operated with no business debt and made many decisions that benefit his company and his customers. One lesson I’ve learned from him is that raising your price won’t kill your business.
My dad told me that at one point in his business, he realized he was not making much money. He ran the numbers and saw that he was closing about 35% of his leads. He had been told his prices were high, which provided a lot of head trash for him to sort through. After working with some business coaches and his accountant, he decided to raise his price, not lower it. How much did he raise the selling price? $10 an hour. In the painting industry, it is a huge leap of faith to bump your price up so much. He kept on estimating and selling jobs and then ran the numbers again. His closing ratio was still at 35%*. It did not drop, but now he was finally making some money. He realized that people will always tell you your price is too high, and he decided he would not let that bother him. He knew he was providing exceptional value and set himself up as the “Nordstrom of painters.” He began to make further changes in his business to make sure that his customers felt his prices would get them the value they were expecting.
Raising your prices is necessary for many of you reading this post. There may be a few of you who have a different business model. Maybe you are going after a type of audience that is middle or lower-middle class and you have to do a lot of volume. If that is the case, sometimes the lower price niche works. I do have a client who runs a professional and inexpensive painting business. He has to sell A LOT of paint jobs to make it. For most of you who are going after the higher-end market and offering exceptional services, set yourself up as the leader in your industry. Look at your business as a whole and make sure you not only raise your prices but exceed your customer’s expectations. Make them know, without a doubt, that they picked the best.
*Side note about my dad’s closing ratio of 35%. Closing ratios take into account what jobs you prequalify. In other words, some companies will prequalify a prospect and deem that person as not a good fit and will not pursue an appointment. My dad, back in the earlier days did not do a lot of prequalifying his prospects, which is why his closing ratio was 35%. It would have been much higher if he cut out some of the shoppers. If you do prequalify your prospects, and are good at sales, a good benchmark should be close to 50%+.