One of the best pieces of coaching advice I ever received in business came from a friend in Edinburgh over 15 years ago.
I had been in business for 2 or 3 years and while I was doing well, I wasn’t doing great. It was a service business, and we had many small clients that were difficult to facilitate fairly. I knew early on that a small client is just as demanding as a large one, because to them their issue is just as important. Everything in business is relative, not to your business, but to your customer’s business.
Despite knowing this I couldn’t step out of the arena of servicing small customers. It seemed that they were easier to get and their projects were easier to complete. That, however, was all in my mind and it wasn’t until a dinner conversation with a good friend that I realised this. My friend and I were discussing my Edinburgh based business, he was an accountant and very interested in the numbers, as is the norm for accountants. I wasn’t so focused on that, but more on the reputation building aspect of having a new business. He asked one astute question “By what factor would my reputation be enhanced landing a blue-chip client versus 10 smaller clients”, the answer was obvious. My reputation would be enhanced far greater with that 1 blue chip client versus any number of smaller clients no matter how many there were. Sure, the smaller clients might talk to their friends and I may get referrals for more similar sized business, but no-one would take a chance on me with a bigger project as their friend would pigeon hole me as the type of business that could do a great job on small projects. This was infuriating me but ultimately, I was the creator of my own problem. I was perpetuating the myth that my company only worked on small projects, but what was the main culprit for this perpetuation? Well, my friend had the answer… It was my pricing.
We talked some more and I kept coming back to the point, that if I hadn’t set my pricing where it was I would never have gotten the customers I had, and he would retort “that is the past, if you want to grow or indeed work less for more money, you need to look to the future, and to do that you need to raise your prices”. I was worried that if I did that I would lose my current customers, but he had an answer to that too.
When you cook a lobster you slowly raise the heat (so I am told), so that it doesn’t notice it’s impending doom. I must say at this point I don’t condone this method of cooking a live crustacean but as a metaphor, it serves my purpose. My friend said something similar, “raise your prices over a number of months”, he pointed out that I would lose customers, but those that I lost are the ones that either undervalued my services or could not afford to keep me on in the long run. They were likely to have been working on fixed budgets so would have stopped using us at some point anyway. I wasn’t sure of this but I went away and did what he suggested. Although his parting words were “you need to double your prices” I wasn’t convinced by that but staged increases could help me get to that point without the shock it would cause doing it all at once.
Months passed, and I had raised our recurring fees 10% every month, adding services along the way that were valuable to the customer but which had little cost to me. I felt that helped sweeten the bitter taste of the price rises, and for 50% of the customers, I was right. The other 50% either left or asked to remain on the lower priced fee structure. And as a result, a 2 tier pricing structure was born, naturally. By month 6 the customers who had accepted the price rises and the additional services were now paying twice per month than they had been, and I was paying far more attention to them than I was to the lower tier customers, as is the right thing to do, as all customers are not created equal. Suddenly the problems my higher paying customers gave me to remedy were not as troublesome as I knew I was being paid fairly to solve them. The lower tier customers understood that the level of customer service would inevitably be lower as they knew they were paying less for the services, yet they too seemed happy.
Of course, I lost around 25% of my customers, but they, almost without exception, were the customers how gave the biggest headaches; the ones who expected the most for as small a fee as possible, in other words, the very customers I “could do without”. But I hadn’t realised the second part of the growth equation yet, that my friend had hinted towards all those months ago. I had fewer customers paying more but I didn’t see the reputational advantage that gained me bigger customers. And then it hit me… I wasn’t advertising the fact that I had a 2-tier fee structure. I toyed for a while with doing so and then made the decision that I would go into every meeting with the sole intention of selling the higher fee service if after negotiation the customer wasn’t biting I would mention the cut down service. This strategy was a huge success, so much so I got to the point that I often walked away without a deal for the lower fee service, as I became more aware that these were not the kind of customers I wanted. And so, again, completely organically, I started to attract and work for increasing larger clients. I even developed, for want of a better term, a platinum package that was 4 times the cost of the basic one. Yet again with far more benefits tailored to a larger client’s needs. In the space of 12 months I had changed my business beyond recognition from a small boutique Edinburgh firm servicing around 20 small business, to a mid-sized UK firm with around 10 blue chip clients and 20-30 small to medium sized business, but while the workload had only doubled (and a couple of additional staff helped me deal with that), turnover had increased by a factor of 10 and more importantly profitability had increased by a factor of 5 with no addition to my personal workload.
So, does doubling your prices really work? Well yes, but only if you are willing to change the focus of your business. Whether you’re a Clothing Retailer or an Accountant, a Gardner or an Engineering Firm, moving from generic services or products to specialised or bespoke ones, could allow you to increase your prices 100% with something as little as 10% increase in your costs per sale. After all are a pair of ASDA Denims really worth so much less than a pair of Armani Denims, or are PWC’s accounting services worth 10 times that of a small local firm. Of course not, the only difference is that somewhere along the line the businesses chose different customers to serve and the pricing was established naturally. You can do exactly the same with your business, just think creatively.