Many business struggle with their profits and their cash-flow. They work crazy long hours and aren’t making enough money.
The biggest reason for this is price.
The price is too low or the pricing strategy is wrong.
Most businesses price using emotion, their gut feel, and by copying competition. They ignore price psychology and price strategy, proven price tactics.
We need to figure out better ways to price.
Here’s an example…
Let’s use this small business havebike as an example. They are a small London-based business that provide a mobile bicycle repairing service.
You can from their website that see they use the menu pricing system with 3 options which is great!
But if we look at the difference in their price options we can see a huge gap between the ‘Deluxe’ and ‘Super Deluxe’ packages.
Firstly, I believe, for a London-based business, all of these prices are too low. Cycling is rife in London and people spend a lot of money on expensive bikes and their maintenance. So I would be inclined to increase the price on all options somewhat.
But, more significantly, I would change the price of the middle option.
The power of the middle option
Price psychology tells us that most people will choose the middle option.
Now I don’t know the numbers for this particular business but let’s imagine it’s this:
So if we were to change the pricing, what impact would it have?
I think you’ll be staggered by what small changes can do to a business.
So, let’s look at their pricing:
We can estimate that around 70% of people are going to choose the middle option.
Now I would suggest we increase that middle price from £65 to £97.
This seems drastic but £97 is still under the magic £100 mark.
I would estimate around 60% would stillchose the middle option. But we won’t lose those customers because anyone that can’t afford this increase can simply drop down to the lower price of the Regular package.
But what we are also likely to see, because we have closed the gap between the Deluxe and Super Deluxe options, is more people choosing to go for the higher option.
They may feel it’s not that much more money and they get loads of bonuses.
Changing the price in this simple way will result in this dramatic change to revenue:
That’s a 30% increase to total revenue just by this small change.
If we run this new number through to work out the profit we see this change:
This has more than doubled their profits!From such a small change to the price.
That’s the power of pricing.
Simple and small changes can drastically change bottom line profit.
If you want to find out more about how to change your profits fast, check out my new book: Price: The Fastest Way to Change Profits.
I recommend you watch the whole video here.
Wishing you every success on your pricing journey.
Chartered Accountant, public speaker and #1 best-selling author of “Effective Pricing for Accountants”
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