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Smart Answers

Time for Price Hikes and Rebates

Anne Graham has been brainstorming strategies to help her clients get past recession and into recovery. Graham is managing director of the Legendary Value Institute, the online arm of her Vancouver-based marketing-and-strategy consulting business. She also serves as a lecturer at the University of British Columbia and a mentor for Lions Capital, a Canadian venture capital firm.She spoke recently to Smart Answers columnist Karen E. Klein about pricing adjustments and other tactics that small business owners can employ immediately, whether they're feeling the recovery or not. Edited excerpts of their conversation follow.

Karen E. Klein: You believe that small business owners ought to revisit their pricing strategies even during recession. How?

Anne Graham: Small business owners are scared to raise prices. They worry about losing business to competitors, so they delay—then they panic and do it the wrong way and raise prices across the board. Their customers get riled up and start talking about getting quotes from competitors.

I recommend raising less-visible prices on services or products that not every customer buys every time they do business with you. Don't gouge your customers, but even a 1 percent or 2 percent or 5 percent increase on these small costs can add up to a big difference in your bottom line. And they won't get noticed like a 10 percent across-the-board increase would. For instance, you probably check the price per gallon at the gas station, but you might not check how much the chips cost in the store.

What about the timing of price increases at companies that are starting to pick up steam?

Here's where the scarcity principle comes in. As people start placing orders again, you start raising your rates. This is particularly good for self-employed entrepreneurs whose time is scarce, or small manufacturers who may have lost some material suppliers in the recession.

The busier you get, the higher your rate quotes should be. I tell new clients: "I'm fully booked, but I'll make time for you," and I always quote a premium price. Small business owners give away their time too easily, working nights and weekends. If you're booked, charge extra to accommodate new clients.

Won't that scare them away?

If it does, you're already working to capacity. In a service business, if you can position your value as return on investment, you can justify almost any price. For instance, I will normally charge $500 an hour for strategic planning work. I got an inquiry from a new client and told them it would be $8,000 a day. They didn't even blink.

Here's another tip: Implement these kinds of changes with your least-profitable, highest-maintenance customers. If I'm going to lose anyone, I want to lose them first.

You recommend that small business owners use more rebates. Why?

Rebates are a great way to deflect requests for discounts. Small businesses get asked for discounts all the time and their margins really get squeezed. This is particularly tough when it happens in the late stage of a recession or early stage of recovery.

The next time someone asks for 10 percent or 15 percent off, tell them you'd like to offer them a rebate once they reach a certain threshold of business with you. Encourage them to make you a one-stop shop. If you can provide things they've been buying from your competitors, offer to bundle those things and give them a price rebate.

Rebates are great because they get paid out after the fact, they don't affect your cash flow and the truth is: Not everyone requests them. Always err on the ethical side by making the rebate real and easy to claim, of course.

Electronics retailers use rebates all the time, but you seldom see them from small businesses.

They are very underutilized and overlooked by entrepreneurs, but just about any business can take advantage of them—with some creativity. The other great thing about rebates is that they are very easy to discontinue. When recovery settles in, you stop offering the rebate and customers tend not to even notice. By contrast, if you take away a discount, people get really upset.

Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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