The Operators Handbook, Vol 2
Given the current inflationary environment, a hot topic of discussion in the Chenmark network is pricing. How do we price our products and services to ensure we don't price ourselves out of the market while still maintaining margins in the face of increasing costs? Of course, every business has unique dynamics that affect how they can price their work. That said, there are some interesting ubiquitous frameworks we can use to create mental models on how to approach the topic. Take, for instance, a Seth Godin post from 2008:
Let’s say your service costs more than the commodity-oriented competition (I hope it does!). Where do you find repeat business or even new business? How do you make a sale (to another business or to a consumer) when you cost more? The answer, of course, is the intangibles. The things that have no price. Things that customers value more than it costs you to provide them. If you don’t have that, all you can do is beg. And begging is not a scalable strategy. If you find yourself saying, 'the boss won’t let me lower the price,' or 'we’re more expensive, but that’s because our cost structure is higher,' then you’re selling the intangibles too short. The stuff people can’t buy at any price, from anyone else, but that they really value….. When providers are stressed or scared or pressured, they instinctively resort to price. It feels real and reliable. It’s a trap, I’m afraid. It’s the intangibles that drive all of the non-commodity decisions, and your job is to build remarkable ones and tell stories about them."
Godin outlines ways intangibles can impact the value of your product/service. Examples – all of which are highly applicable in the small business space – include pro-actively reaching out to customers ahead of renewals, being pleasant to work with, being fast with your turnaround time, or being even faster to respond if there's a problem. These are all controllable actions that any business can put into use to support a price increase.
That said, we have often observed (and experienced) that by far the biggest barrier to increasing prices is not necessarily the customers. It's the hesitation from the operator herself. We recently did an interview with The Operator's Handbook about pricing strategy in a Chenmark operating business. From the interview:
As a new CEO, I definitely had a little bit of hesitation about increasing prices so aggressively. I thought to myself, 'Oh God, if I increase these prices, maybe people won't buy these things anymore.' But at least in this type of business, we could have simply decreased prices if demand dropped off. The prices for our [services] are not a permanent thing. We can change things pretty rapidly. We can also test out higher prices on certain products, and not others, just to see what the customer reaction will be.
I think a lot of people end up not increasing prices because they're nervous about it. I feel like you might as well try; if it doesn't work out, you can always adjust. But getting over the nerves of raising prices was probably the hardest part of this whole thing. If you can take a shot and go for it, you may be surprised by customers’ reactions (or lack of a reaction!)."
Once the operator gets over her hesitation and is able to garner the confidence needed to communicate those intangibles that drive value, that's when things get interesting. If you're interested in reading the full article, you can subscribe to The Operator's Handbook here.
Have a great week,
Your Chenmark Team