By Kai-Markus Mueller, below, Professor of Consumer Behavior at HFU Business School and Director of Pricing Research at Neurensics
Big guys have entire departments and rigid processes established to revisit their pricing regularly. But pricing is not for the big guys only. In the heat of their day-to-day pressure, small and medium size business owners do not get around to do proper re-pricing or they fear for the loyalty of their customers as a reason to refrain from price increases. But: in times of inflation, it is mandatory for the longer-term financial health of one’s company to forward increased cost to their market.
Don’t Be Afraid to Adjust Prices
Many small business owners fear raising prices because they worry about losing customers. Don’t let this stop you from increasing prices if needed – one tip is to simply call it a price adjustment, implying that you don’t do this for profit only. Also, try to ensure that your price increase is justified with perceived benefits or improved services/products — otherwise, people will feel cheated out of their money instead of feeling like they got great value for their purchase.
Premiumization
Sometimes price increases may even help attract more customers because higher-priced products are seen as having better quality or being worth the money spent on them. We have recently talked to the head of a small law firm. Clients preferred working with the boss over his employed lawyers. Hence, he raised his hourly rate in order to alleviate his workload. However, as a result the clients even more so requested to work with him personally.
Want to sell the salmon? Offer a steak!
A huge deal of pricing is understanding the psychology behind it, especially how people choose. Consider offering multiple tiers of pricing (e.g., basic versus premium), as this gives customers more choice and potentially increases perceived value at each tier level. Take, for instance, the restaurant where people tend to eat the second most expensive food, e.g. the Viennese Schnitzel. However, the most expensive food – the Fillet of Fresh Salmon is hardly being chosen. If you want to sell the salmon, add a Ribeye Steak at the highest price. Customers will then tend to gravitate to the higher-priced salmon and you will have raised the revenue per customer without raising prices.
Research Your Market
Knowing what customers are willing to pay for your product or service is essential when it comes to pricing. Do market research to understand your target customer’s needs, wants, and price points. This will give you a better idea of how much they’re willing to pay for your product or service as well as how competitively priced you should be in order to stay competitive in the market. While classic questionnaires are not reliable, there are modern implicit methods based on reaction times, online A/B-tests or even brain scans. Such methods have become affordable in recent years. Recently, I ran a study to understand value perception based on subconscious reaction times for tickets to a small gallery. Based on the results, the institution now charges 20-25% more per customer without any pushback.
Charging for additional services
While sometimes there is no wiggle room for the main product, there are oftentimes additional services or spare parts which allow for profitable business. Automotive manufacturers compete on low base prices but make large profits with accessories, features, and after-sales. A hairdresser may consider selling haircare products, a web designer may offer to host the websites, or a physical therapist may offer access to fitness devices such as treadmills. Of course, some industries have driven such models to the extreme: printers and razors are infamous for making multiples on their consumables compared to the core device.
Play and win the Invisible Game
If you work in a B2B market, all of the above-mentioned mechanisms will work. However, you will likely have significantly fewer deals than your colleagues running a small consumer business. That means, it is particularly important for you, to understand the math and the psychology of prices. While the math is rather straightforward, the interaction between seller and buyer is characterized by plenty of invisible, psychological mechanisms. To play this game successfully, you will have to work on fine-tuning your antennas, defending your prices, and actively design the choices for your customer.
In conclusion, pricing is not only for big businesses – small business owners should not be afraid of adjusting their prices as needed in order to optimize cash-flow and maintain a stable budget. By understanding the visible and invisible components of the sales game, small business owners can increase profits while also building trust with customers.
Kai-Markus Mueller is Professor of Consumer Behavior at HFU Business School and Director of Pricing Research at Neurensics. His new book The Invisible Game – The Secrets and the Science of Winning Minds and Winning Deals is published by WILEY.
