Friday, August 27, 2010

2 words to improve your margin: raise price

In his book The Art of Pricing, Rafi Mohammed discusses the most effective strategies for growing a successful business.  Recently, he summed up his point-of-view in an interview with Bloomberg Businessweek.

The recession saw consumers closing their wallets and, as a result, businesses were forced to drop prices to remain competitive.  While larger corporations were able to cut costs rather than profit, small and mid-sized businesses did not have that luxury.  Fortunately, consumer confidence is on the up, and now is the time to raise prices once again.

What is the best way to go about making this change?

Mohammed recommends framing the increase in a way that consumers can relate: "As you did, we tightened our belts during the recession.  We're happy the recession is over. Our costs are going up, and we're going to have to pass on this price increase."

He also emphasizes the importance of setting prices on perceived value, rather than actual costs.  In order to differentiate your product from another, he argues that you have to offer a greater value to the consumer versus the next best alternative.  So if your product costs more than your competitor's, you need to inform the consumer of the additional benefits they will receive for paying a higher price.

Click here to read the rest of his interview.

And here are some other highlights of the book:

When it comes to setting prices for products and services, even the most sophisticated businesspeople often rely on formulas and seat-of-the-pants instinct, based on what the competition is charging, marking up costs, and doing things as they’ve always been done. The result is that businesses of all sizes, from start-ups to the Fortune 100, leave money on the table.  In The Art of Pricing, Rafi Mohammed shows:
  • The astonishing impact that small changes to a pricing strategy can have on the bottom line
  • How the right pricing strategy can boost profits and grow your customer base
  • Why the right way to think about pricing is as a series of easy-to-implement strategies that allow companies to serve and profit from the largest possible customer base
  • Why the art of pricing involves understanding and capitalizing on the fact that different customer segments are willing to pay different prices for the same product
  • Why an effective pricing strategy is not about price gouging but one that incorporates fairness into every important pricing decision

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