As was outlined in the introduction to our Pricing Module, even small changes in the prices of your product goes 100% to your bottom line Profit (assuming demand doesn’t change).  Consider a business turning over $500,000 per year. Let us further assume that it makes a 5% profit on that, which gives it a Profit of $25,000.  A price increase of 1%, assuming demand remained constant, would lead to an extra $5,000 in Income. This extra $5,000 profit, over the original $25,000 profit, is an 11% improvement.

In keeping with our 80/20 philosophy this article discusses a rapid change to your pricing system that can flow virtually 100% to your bottom line Profit. It is a rapid, and not very subtle, change that you can later adapt to make it more focused and more successful.  This is a yellow belt article

Read more about how our training materials are structured, go to the article:  12Faces Training Approach Training Approach 
In keeping with our philosophy of using a PDCA Cycle, this Project is outlined in that format.
Go to the article: How the Plan/Do/Check/Act (PDCA) Cycle Builds Important Routines

Price Increase Plan

Reflection

Before launching into this exercise, here is reassurance that the exercise can work and will have a significant impact.

Read about several case studies and the results of some research in the Skills Module introductory article: SM1.0 How 1% Price Change Gave 11% Profit Increase 

Run the TrendBoard analysis, one of the results provided is a ChangeBoard planning tool that allows you to play with various percentage price changes. You will instantly see what the effect on profit is.
Go to the article: Discover Your Business’s Secret Future
Download a Case Study or subscribe to the TrendBoard.

Goal

Any Plan should start with a Goal.

Go to the article: How to do Goal Setting for Business
or Go to the Leaders Briefing: LB3: Quick Goal Setting for the Time Poor

In this case:
Your goal is to quickly implement a fairly uniform price increase across your range of products or services. Continue to raise the price until significant adverse effects begin.

Global Price Increase Scenario

Having set a goal, the first and obvious question is “how much should I increase the price“?

This can rapidly deteriorate into a complex discussion as you get overwhelmed by alternative scenarios. The easiest way to do this is simply increase your prices across the board by a particular amount that you think still allows good value to your customers.

It is easier to raise prices than drop them. Did the amount that you increased them by turn out to be a poor decision? Either rapidly drop them back to the original price or somewhere between your first experimental pricing point.

Complete the Check and Act components of the PDCA Cycle to help you decide if the change was worthwhile.

Selective Price Increase Scenario: 80/20 Rule

Sometimes an across the board increase may not be feasible. You may consider it too risky to increase everything at once.

In that case, experiment with some subset of your product and services that will not be too badly damaged if the pricing increase turns out to be a poor decision.

Have you studied the 80/20 Rule? You will know that 80% of your Income comes from 20% of your Products.

Therefore, you will get the greatest impact by increasing those 20% of products.
On the other hand, if you do not want to fool around with these most precious products, experiment with pricing changes on the 80% of products. Because they will have a much lower impact on your overall profitability.
Experiment with either of these strategies without necessarily seriously damaging your sales of products and services.
Go to the Skills Module introduction: SM2.0 80/20 Sales Growth; Double Sales, Triple Profits

Selective Price Increase Scenario: Longer Term Pricing Systems

Is the price at which you can sell some of your products and services governed by competitor pressure?
It is unlikely that you can simply increase your prices if you are in a market where you have other competing suppliers who don’t increase their price. This might be particularly true in many retail situations. In this rapid implementation scenario, you may choose to not change those competitive product’s prices.

In the next article in this Skills Module, Longer Term Pricing Systems, you can see how it is possible to increase the price on competitive products over time using different pricing strategies.
This will create a “niche” product that your buyers find harder to price compare against other suppliers.
Go to the next article: SM1.2 Longer Term Pricing Systems

You may get a fall in your sales volume but providing:

A a rough “rule of thumb”, consider that, if customers are not complaining of price increases, you probably are still not charging enough!

Selective Price Increase Scenario: By-Products

Businesses with lots of regular customers are likely to have many that do not generate much revenue (80% in the 80/20 rule).
One of the by-products of increasing the price is that some of these small customers will fade away. Your very large customers are less likely to notice that the prices have gone up.
Therefore, you can gradually increase the average amount of income from each customer by slowly pricing out low value customers.

Also, consider a further saving from phasing them out.  All customers have some element of Fixed or Overhead cost by virtue of simply being a customer. Things like the per-client expense of running a Help Desk is probably the same for a high value client as it is for a low value client. The return on Help Desk investment is much lower for the low value client.  Removing these low value customers helps reduce Overhead Costs. They take up resources like time and staff that you can not necessarily charge for.

As well as this level of planning, think through the changes to your administration, information systems and other related issues.
This is discussed in the article: 12Faces Training Approach

Do

As we do not have an intimate knowledge of your business, we are not able to give you specifics on how to implement these pricing changes.

We do offer a coaching service, which you may wish to take advantage of on an as-needs basis.
You can see more about coaching at: Business Coaching

Use the Planning techniques – Kanbans and similar Project Management systems – to execute the short term pricing changes.
These are discussed in the article: 12Faces Training Approach

Check

The process of checking progress during and at the end of your Project implementation is critical.

The intention is that you ratchet up your business’ profitability, so you need to keep a regular check on whether that is happening.

Depending on the duration of the Project, you could build some simple reporting systems into your existing accounting system.

Example:

Depending on the nature of your Sales monitoring systems, it might be easiest to put in “trigger points” so that, if the volume of sales falls below a certain point, you get the equivalent of a flashing red light.
The trigger points can be set at a level where the extra Revenue from the increased Price equals the loss in Revenue from lost Sales.

At the end of a particular cycle of the Project, you want to be able to determine what the outcome of implementing the Project was.
You aim to have sufficient information to decide whether or not to continue in the Act stage of the PDCA Cycle.

Act

By the time you have reached this stage of the PDCA Cycle, you have implemented your Project to some extent and you have some results from that implementation.

What Next

You now have several alternatives open to you about how you progress. With an increase-price Project, these will include such things as:

Feedback

As a valuable contribution to others who might follow you in this process, we would very much appreciate your feedback in general terms about the experience. Include how you feel this pricing training material might be improved to make it more useful.

Please feel free to email us on reception@12faces.business with any positive or constructive negative comments you may have.
Some articles have an area at the bottom of the page for feedback.

Price Increase Wrap Up

At this point, you should have successfully implemented the first step of the Skills Module to make rapid increases to your Prices with a view to maximising your Profitability. This is done by setting a Price that your clients consider offers value but which is greater than the Prices you have had historically.

As mentioned in the Act part of the PDCA Cycle, you can go back and repeat this exercise or expand it out over more products and services.

Once you have exhausted the opportunities from short term changes to your Prices, read the next article, in this Skills Module, on Longer Term Pricing changes.
Go to the article: SM1.2 Longer Term Pricing Systems

That will approach your pricing methodology with more sophistication than we have done here with this simple across-the-board price increase. The longer term pricing article will show various methods that allow you to increase the price even on competitive items.

Resources

We have several different “paths” by which you may have reached this article on Rapid Profit Increase from Short Term Price Change.

12Faces has 3 channels by which we direct you to solutions that may help improve your business:

  1. Our various Boards give you a simple dashboard measure of the strengths and weaknesses of your organisation and the impact of change on any of the variables that are discussed in that particular Board.
    Go to the article: Discover Your Business’s Secret Future
  2. We have bundled up a number of strategies into Campaigns.   We have a Campaign for each of the various stages of the life cycle of the business. From a business that is in trouble to those that are successful and need a long term innovation strategy.
    Go to our list of Campaigns: Subscription Categories
  3. There are probably aspects of your business that you feel can be done better.  Sometimes you know what it is that you want to fix.  Other times you know that you have a problem but you don’t quite know what it is and therefore you do not know how to fix it. We have developed a set of Diagnostics that allow you to address either “I know what is wrong” or “I don’t know what is wrong” scenarios by recommending potential solutions.
    Go to our list of Diagnostics: Level 1: Start Diagnostic
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