You know the allegory about how to boil a frog…
If you put it in a pot of boiling water, it will immediately jump out to save its life.
But if you put it in a pot of pleasant, tepid water and gradually heat it up, by the time the frog notices that the water has reached boiling pot, it will be too late.
The lesson is that you need to introduce change gradually. People (like frogs) will resist sharp shocks, but will accept things that creep up on us slowly.
In the past, I’ve used this famous little tale to explain how to raise your prices…
…Often, but in small enough increments that they’re not too painful for your customers. With rises spread out over a couple of years, they won’t even notice that they’re paying an additional 10%.
But that’s emphatically not what’s happening in the market right now.
In the current unstable economic environment, many companies are finding that their costs are rising enormously. Their profit margins are being squeezed, sometimes out of existence.
As a result, they’re raising their prices. But whilst in the past, this may have meant a 2%… 4%… even 5% increase, now they’re commonly lifting what they charge by double figures, all at once.
In short, they’re throwing that frog right into the boiling water.
So is this a terrible trend? Are these companies going to regret their massive jumps in price?
And if you’re thinking about raising your prices, how should you go about it?
My thoughts on this have changed a little recently.
You see, the safest way to raise your prices is still gradually, over time, rather than in one fell swoop. If you can afford to do it that way, stick with that method.
But that’s easier to do in stable times, when there’s no real urgency to your price rise.
Right now, the economic pressures are so great, you may not be able to survive financially if you raise your prices by “just” 4% or 5%.
The good news is, you have more leeway than usual, because in this environment everyone understands that costs are rising and all your competitors are raising their prices too.
Customers are more likely to accept price jumps they would have balked at a couple of years ago.
So, you might as well raise your prices as high as you can – the maximum you think you can get away with.
Of course, that doesn’t mean doubling your prices or charging some fantasy price…
Your new pricing structure needs to be based on real numbers, not gut feeling or guesswork. I’ll explain next week some of the critical factors you must consider.
But one of the most important ones is: What can the market bear?
What is the point at which good, valuable customers find your price rise too painful and go elsewhere?
(Do not pay the same attention to the customers who moan at any price rise, or who you would prefer to get rid of anyway. You cannot afford to run your business according to their whims.)
So, after calculating the highest you can go, monitor push-back closely.
If there’s a lot of resistance, you can always bring prices back down a bit, or give your best customers a discount.
In the current environment, that’s probably better than being too cautious, then finding 3 months down the line that you need to tell price-conscious customers about a second price hike.
It’s a bit like salary negotiation in a new job. Ask for more, in the expectation that you’ll get less.
Or, to return to the frog analogy, bring the pot to boil – and if the frog shows signs of jumping, bring it back to a simmer!
Raising prices is as much an art as a science, which is why it’s so confusing. And it can feel risky and frightening to tell customers you’re going to be charging more.
But right now, it may be critical to the survival of your business.
If you’d like help working out the best way to raise your prices, get in touch with me today.
It’s one of the services we offer our clients, so they can grow faster and increase their profitability. And we’d love to talk about how we can help your company do the same.
Warmly,
Garry
