How many of you, as small business owners, set your prices when you first started your business and now, 3, 4 or 5 years later (or even longer) are charging the same amount?
According to the Bank of England inflation calculator, the cost of goods and services rose 16% between 2010 and 2015. In the context of a simple consultancy business where a day rate is used to calculate the sale value your original £500 day rate should now be £580. If you’re still charging £500 the extra costs which inflation has generated are coming straight out of your profit. You’re worse off than you were in 2010!
I’ve been to business seminars where motivational speakers urge small business owners to ‘just put your prices up!’ If you’re way behind the market rate for what you do that can be a simple and effective solution. However, what if your prices are on a par with your competitors, if you’re in a commodity sector or new ways of delivering what you do are emerging rapidly?
When you’re on a par with your competitors.
In this case, it’s all about value – how can you add the greatest value to your target customers and with a clear distinction from your competitors. How can you deliver your products or services better or faster and with greater results for the client? The differences between you and other potential suppliers don’t have to be massive but they have to be valuable to the client. Take the example of a web designer – while they may have similar WordPress skills they could have specialist experience of on line shopping systems which would be highly valuable to businesses looking to sell online. In the proliferating area of coaching a coach who works mainly with children may set themselves apart from equally qualified coaches by allocating a percentage of their fees to a children’s charity. Again, the value of this difference is in how it is seen by their target market – will it make them more likely to work with this coach than with another.
When you’re in a commodity sector.
Where price is truly the only differentiator then you need to be excellent at managing your own costs – negotiating with your suppliers, finding alternatives and continuously finding ways to be more efficient. However, it is rarely the case that price is the only factor. The quality of fuel for our cars doesn’t vary from garage to garage but the price certainly does. Those businesses recognise that they can differentiate themselves in other ways – onsite shop, loyalty cards, ‘the last petrol station before the M4’, and 24 hour opening, for example. For the small business owner, printer ink cartridges are perhaps an example of a commodity. However, we make decisions about where to buy it based not only on price – especially when it’s midnight and you’ve just run out of ink while printing off a proposal to hand to a client at 9 o’clock the next morning! Think, how else can you deliver your commodity to add extra value.
When your competition doesn’t look like you!
In our rapidly changing digital age competitors don’t always look like us. Training companies, amongst many others, know that they are competing against online courses, Youtube videos and the mass of content on the web – as well as other training companies. Social media management businesses are now not only competing with other companies who offer similar services but with apps and programmes which offer increasingly sophisticated automation. Again, reducing the price isn’t necessarily the answer. Argos is often quoted as a good example of a retailer who recognised this challenge – and successfully incorporated the challenger by offering a good online ordering service. For those of us in smaller businesses the lesson is to look not just at our direct competition but at indirect and work out how to keep our value high rather than our prices low.
Helping SMEs – business owners, managers and their teams – to build resilient businesses with happy and engaged teams. Find me at …