Most businesses are only able raise their prices in increments. In a world where most businesses compete purely on price and go for the high volume low price approach, raising prices is something that they are only able to do when the entire industry raises their price.
While the high volume low price approach may work brilliantly for businesses that have a lot of capital, the same may put small to mid sized companies with limited capital out of business. The reason is that competing on price means that the entry of any bigger competitor that can offer lower prices to your customer means your business model maybe threatened overnight. Because if you are already having low margins, you may not be in a position to offer further discounts and may go out of business.
The only sustainable business model for smaller companies is one that allows for healthy margins. But how do you get healthy margins in a marketplace that cares mostly about price?
There are two keys to be able to do so.
- Changing your positioning
You have to change your positioning from a lowest price solutions provider to a lowest cost/highest value solutions provider. Now you may wonder isn’t lowest price and lowest cost the same thing? No it isn’t. Price is what you pay for something on paper. Cost is what you actually pay for it in the long run. Some of the lowest priced things can be incredibly costly in the long run if they keep breaking down or stop working when you most need them, leading to irreversible damage.
For example, if a machine is priced low, it may appear to cost less but the same machine can cost a company tremendously if it breaks down or is unable to produce enough output to fulfill a big order. A higher priced tag machine may appear to cost more but if that machine is robust, requires less maintenance and has a bigger output, that machine costs you tremendously less.
The only way to improve your margins is to switch from being the lowest price provider to the lowest cost/highest value provider NO MATTER what your price is !
2. Changing who you sell it to.
While there are many customers who will go for a high value solutions provider, the truth is there are many people who want the lowest price, no matter what. If you only sell to people who are only concerned with the lowest price, you will always lose out in a market like that, unless you are the one who can provide the lowest price.
If you sell to a cheap market, the only way to make that work is sustaining huge volumes, which we know is not always possible. Also, cheap has nothing to do with how much money they have as even some customers with the biggest pockets can be tremendously cheap and be only concerned with price, not cost.
The only way to greatly raise your prices in such a situation is actually target a different market altogether. Now depending on your industry/business this may or may not be possible, but if it is and you are serious about greatly raising your prices, making the switch will play a tremendous role in determining if you are able to do so.
How to actually implement this?
Making a switch overnight to becoming value focused and changing your market is obviously not realistic and will lead to you losing existing customers. A better strategy would be to create new premium offerings for the value focused marketplace and test how it performs in the market. If it succeeds, you can scale it up and gradually make a switch to a value focused positioning. If it doesn’t, you still have your price focused customers and lower priced offerings to fall back (for now). But no matter what, remember, all great things lie outside your comfort zone. Only those who shoot for the moon, have a chance of landing among the stars. The question is do you want to go for something new or stick with the old? The choice is yours.