Ray had stumbled on a unique market niche — processing and selling a by-product of meat production. His business grew from a regional clientele to a national market and then an international market. The process enabled him to ship his product “fresh” using a specially designed container that allowed customers to visually check freshness.
The problem
Several competitors entered the market. Each one had a different slant on the production process allowing them to make their own claims on quality, freshness or purity. But none had an advantage sufficient enough to charge a premium price. As a consequence, price — low price — became the customers’ primary selection criterion and price often tipped the scale in favor of one competitor over another.
The solution
We started The Profit Process with an analysis of the last five years. As usual, the process spotlighted some important facts that were overlooked in the day-to-day stress of running a business: both the gross margin and the unit price had declined. Gross margin had declined nearly 7.5 percent, a loss in net revenue of nearly $200,000 due to rising costs and declining prices. It had been nearly seven years since he’d raised prices for all customers. During that period his volume had risen modestly. But Ray had a predictable fear — that raising prices would result in a loss of volume and revenue.
First we calculated the trade off of new revenue from a price increase against the lost revenue due to lost customers. He was surprised he could remain “revenue neutral” (possibly even increase revenue) by raising prices even while losing some volume — in short, the price increase made up the difference.
We started by announcing a price increase to a small group of infrequent buyers. When they did not react negatively, we picked a second, larger and more frequent buyer group. Interesting — very little adverse feedback. We then raised prices for all customers.
The result
We did lose a few customers, but the increase in net revenue from all customers more than made up for the lost revenue from the ones who left. In fact, the first set of price increases won back more than half of the lost $200,000. We waited a year and raised prices again. As soon as we announced the second year price increases, our two principal competitors raised their prices as well.
Commentary
This may come as a surprise, but your customers actually want you to succeed. They have come to rely on your product or service to do what they do. Efficient supply chain management is a big focus of business today; you are a part of a “supply chain.” Price is only one of several factors that savvy managers consider when making supplier decisions. The good ones know that low price doesn’t mean low cost if the low price is accompanied by poor quality or missed deadlines. They will pay more to keep problems and interruptions out of their processes.
Profits signal several things, but the most important thing profits signal is customer satisfaction. If your profits are too low, something is surely wrong. Determine first how satisfied your customers are. You can do other things but the quickest way to measure customer satisfaction is to raise prices — selectively maybe — because a price increase forces the customer to ask, “Is this supplier still doing the job?” If the answer is “yes” they will pay more. If not, they won’t. It’s better to know, even if the answer is “no,” than to hope the answer is “yes” but not ask.
Raising prices takes courage; there is always some anxiety in doing so. But courage is acknowledging the facts — as well as the fear — and moving on the facts over the fear.
Don Morrison, a CPA, is the founder of The Profit Process Co.in Penn Valley, CA. He is the author of “The Profit Process™ for Small Business: From Mom & Pop-to-Chairman & CEO-to-A Prosperous Retirement.” Reach him through his website at www.theprofitprocess.com.
