Robert’s seventh book, Grow Your Digital Agency will be released soon, in the meantime, here is a little taster of what to expect around MONEY.
We Need To Talk About Prices
The FiMO model tells us that in order to sort our finances we need to sort out our marketing. (For most agencies, Operations are pretty good so to improve Financial performance you need to improve Marketing performance).
But, and this is a big but… Before you can sort out your financial performance you have to sort out your financial model. So how do you do it?
PUT PRICES UP? PUT PRICES DOWN?
People always ask about whether to put up prices or reduce them. Please, please, think very carefully before you consider putting prices down. Let me explain my thinking.
THE ROAD TO BANKRUPTCY
The road to bankruptcy is paved with people who tried to buy customers or market share by cutting prices.
In my humble opinion…
Always try to avoid a price war, as it is unlikely that you will be the winner. There is always a bigger player who has bigger marketing power, bigger buying power and deeper pockets. You will end up reducing your margins… Some competitors/people may go out of business… (They euphemistically describe this as a ‘shakeout’ in the industry!) And you’ll get less profit per sale than you got before.
The other option is to raise prices.
“You must lower prices to keep or get the business.”
THE STAGGERING TRUTH
“The average proportion of consumers across all categories who were motivated by price was around 10 per cent and even if this increased during a downturn, the proportion would remain small.”
[Advertising in a Downturn, IPA]
“Cutting prices is usually insanity if the competition can go as low as you can.”
[Prof M Porter, Harvard Bus Schl]
PRICE CHANGES IN A NUTSHELL
Lowering prices probably attracts the wrong clients and eats into your profitability. Raising prices means you lose the pond life and become more profitable. I know which one I prefer.
WHAT HAPPENS WHEN YOU RAISE PRICES?
Inevitably you will lose some customers when you put up prices.
However, the clients you normally lose are those that are ‘buying on price’ – to me these are normally what I would describe as ‘pond life’, clients you would be happy to see the back of… They buy on price, pay late and always want more. You don’t need these types of clients.
And the irony is… that your most profitable clients often don’t notice the change in prices because they aren’t buying on price alone; they are buying on quality or value-added.