Profits Down? Raise Your Rates

When sales are down, the first instinct for many business owners is to lower their prices.

You, too? The temptation is strong.

Yet, you ought to resist that temptation. Or, even, do the opposite -- raise your rates when sales are slow.

That's been my experience since 1998. And it's the subject of a recent article in The Wall Street Journal. Here's the key excerpt:

But some research indicates that racing to lower prices—even if it lures more customers—doesn't usually put a company ahead. Even in down economies, raising prices just slightly can have a greater bottom-line impact than lowering them, according to a study in the McKinsey Quarterly, published by the business management advisory firm McKinsey & Co.

A price rise of 1% at an average company in the S&P 1500 index, which includes large-, mid- and small-cap companies, would generate an 8% increase in operating profit if sales volume stays steady, the study found. By contrast, a price discount of 1% reduces profit by 8%. Typically, in order to offset the impact of a 5% price cut, volume would have to rise by about 19%.

Small firms, especially, are likely to feel the impact of a price cut because—unlike big-box stores—each product represents a much larger portion of their profitability ...

It's an eye-opening article, with at least four takeaways you can profit from today ...

1) Raise your level of service along with your prices, for maximum effect (that's what Allen Ackerman did when he added the social networking tool and raised his fees):

 ... business owners walk a fine line between increasing revenue and alienating customers. A-List Placement's Mr. Ackerman says prices at his firm went up in tandem with extra services he offered.

A-List Placement claims a percentage of each new hire's salary, historically about 20%. But when hiring dried up a few years ago and his clients wanted to pay less, Mr. Ackerman decided to created an online social-networking tool, called the Hire Syndicate, that allows recruiters to share information about candidates and job openings. The 500 recruiters now using the site can more quickly find the perfect match for clients.

He says that enhanced service allows him to charge as much as 25% of the employee's salary today, though he makes an exception for long-time clients who say they can't afford the new rates.

2) Go after those clients who can pay more (that's what Brett Klasko does in targeting high net-worth investors with his newsletter service):

... His New York-based firm, Investors Alley Corp., sends stock-market newsletters via email to subscribers.

The company, which generates most of its revenue from advertisers, invested in a better email delivery system last year to insure the newsletters were delivered more quickly and didn't get caught in spam filters. That move boosted his circulation—from 75,000 readers in 2008 to 125,000 today—and allowed him to target more-active and higher net-worth traders. Not one advertiser left when Mr. Klasko raised prices 7% earlier this year, he says. 

3) Bundle products/services together when charging more (that's what Shel Horowitz did when he switched from charging by the hour to charging by the project):

... Horowitz, who owns Accurate Writing & More in Hadley, Mass., offers marketing services such as writing book jackets and press releases. After business dropped 25% in the recession, he decided to change his pricing model from $175 an hour to a set amount for each assignment. The new prices deliver an about 25% to 30% pay increase from his prior model, he says.

"A lot of clients are more comfortable with a flat-fee per service," he explains, adding that returning customers haven't been fazed by the change.

4) Test small, to avoid big disasters (that's what Manny Apolonio did when upping his rates to $40-60 for a few clients, who didn't flinch):

He had set up his company, a concierge service that runs errands for clients, a year ago with rates of between $20 and $40 an hour. As he became inundated by referrals, Mr. Apolonio realized that there was opportunity to raise prices to between $40 and $60 an hour.

"I tested the waters with a few clients and they were totally receptive. We became profitable in June and I'm still incredibly busy," he says.

In most of the cases I've seen over the years, higher prices are more of a barrier in the business owner's mind than in the customer's. But, as with all new ideas, test small before rolling out big.

This is another example of "Inside Marketing" -- improving your marketing from the inside, by making a few changes to what you're already doing.

(For more ideas like these, download Guaranteed Marketing for Service Business Owners.)