Experienced entrepreneurs know price is the dominant profit factor. While profits can be increased in a number of ways, raising prices is the simplest method that yields the biggest result. A mere one percent change in price can generate double digits changes in net profit percentages.
In a study published by McKinsey & Company of the Global 1200, and in the words of Rafi Mohammed, author of the The 1% Windfall: How Successful Companies Use Price to Profit and Grow, studies suggest “if companies increased prices by just 1 percent, and demand remained constant, on average operating profits would increase by 11 percent. Using a 1 percent increase in price, some companies would see even more growth in percentage of profit: Sears, 155 percent; McKesson, 100 percent, Tyson, 81 percent, Land O’Lakes, 58 percent, Whirlpool, 35 percent.”
Use price to profit and grow
If pricing is so important, certainly it’d make sense for entrepreneurs to put some serious effort into it, right? Unfortunately, most entrepreneurs overlook this opportunity and simply look around to see what everyone else is charging and set their prices to fit within reasons of the norm. Big mistake!
Tim Williams, one of my early career influencers, would say “pricing is positioning,” and they’ve just wasted a perfect opportunity.
So, how should we go about pricing then?
Here are three questions to help you get on the right path:
1. What problem do you solve?
Value, like beauty, is in the eye of the beholder.
My buddy Brian and I were chatting the other day. We agreed that problem solving should be top of mind for all entrepreneurs. Identify the problem and subsequent pain your audience experiences. This is a main component when you decide how much you should charge for your solution.
When most entrepreneurs are busy figuring out costs and guessing on pricing, the right thing to do is to go to the source. You need to understand the value you are creating. Remember, everyone only cares about themselves. Your customers don’t care about your costs and time spent on the solution. They care about the problem you can solve for them.
2. Who are your customers?
After you identify the problem are you will solve, it’s time to ask yourself: “Who are we solving the problem for?”
The person that you solve the problem for, how much value they place on a solution, as well as how much they can actually afford will determine the price you set. Many entrepreneurs would like to think their products or services are worth X and they are in a market of their own, they are wrong. You cannot charge more than the market will bear. That is just one of the few rules everyone has to abide by.
While a small island in the Pacific might be on sale for the low price of $80 million this holiday season, I am not the right buyer for it no matter how it’s priced. I am the wrong audience because I just can’t afford it, even if I really wanted the island.
3. What do you stand for?
While we would like to think our frontal lobe makes us adults capable of rational decisions, we are not. If anything, scientists have proven we are predictably irrational when it comes to most things in life. People are driven by emotions, so it is important that your brand speaks to them as such, and there is real value here that people would pay for.
If you think your product or service is a commodity where branding and emotions don’t apply, take a walk down the water aisle next time you are at your supermarket.
There, you will find one of the best examples of branding’s effect on price. Products like reusable grocery bags and recycled tableware are other examples that appeal to the consumer’s desire to be environmentally friendly.
Does your product and/or brand offer similar emotional value? If not, it might be worth looking into and should be applied to your messaging. It’ll certainly increase your value to your customers and, who knows, you might be able to charge more for it.
When you answer these three questions you can set the perfect price for the value you create for your customers. With these concepts in mind, moving your revenue by just 1 percent doesn’t seem to be all that difficult, right? Remember, even one percent can yield a big impact.
This article has been edited.
Michael Hsu, founder & CEO of DeepSky, is passionate about knowledge and entrepreneurship. He believes entrepreneurs should focus on taking over the world instead of building and managing their accounting departments. With that belief, he created DeepSky. A version of this article originally appeared here.