Small Business

Rafi Mohammed: Getting Pricing Right


Small businesses should feel confident about charging more, says the author of The 1% Windfall

Why do you think small businesses have seen profit margins shrink?

During the recession, companies of all sizes kept their prices low, which means either reducing costs or reducing margins. Small businesses had less flexibility to reduce their costs than big companies; they couldn't outsource as much, for example. So they opted to take the hit from the profit side.

There's lots of talk about "frugal fatigue." Is it time to raise prices?

Definitely. When things were really bad, consumers were in frugal mode. They're now feeling more confident. They're saying: "I'm tired of penny-pinching. It's time for me to go out and spend a little more." That's an incredible opportunity for businesses to increase prices and make higher margins.

How should companies frame a price increase?

The messaging is crucial, particularly for small businesses. It should be something along the lines of: "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."

Your main strategy—setting prices based on perceived value instead of costs—seems like common sense.

Yes, but 90 percent of companies simply mark up costs. Pricing has always been confusing for companies. They continue to set prices based on "This is how we've done it over the years," not strategy. There's often a lack of confidence in the value of the product or service. Most people in the company, not just in sales or customer service, need to understand why they're in business, why the business is so interesting, and what the pitch is.

Pricing is about the value that the product offers relative to the next best alternative. If potential customers are using a rival's product, you need to justify why they should use yours. "Sure we offer fewer attributes, but we're cheaper." Or, "Gee, for only 15 percent more, you get all these attributes." When consumers buy a product, they're in essence saying, "I looked around at all of your alternatives, and you offered me the best value."

This also means changes for salespeople, doesn't it?

A lot of times the sales force is shooting in the dark in terms of what they're emphasizing. By better understanding the profit margins—and by being compensated on profits [as opposed to volume]—their financial interest aligns with the company's: making the most profitable sales it can.

Leiber is the Small Business Channel Editor at BusinessWeek.com.

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