Many business owners work hard to get their product right and attracting potential customers. But spend little time on the decision that rewards all that hard work – setting the price.
This blog article is based on Strategy 1: Pricing from my e-book ‘10 Cash Flow Strategies for a Successful Business‘. Click the link to download it.
The easiest way to increase cash flow is to increase the price of your products or services. What is the most important consideration when increasing your prices?
The Chinese Silk Manufacturer
A Chinese silk manufacturer had set a low price of around 250 yuan for its scarves. The cost to make the scarves was low so they could make a decent profit. Compared to their competitors it was an extremely competitive price. A French company was selling the same scarves for around 2500 yuan. They actually bought the scarves from the manufacturer. That is ten times for the same product.
The silk manufacturer should have been competitive with its huge price advantage. Yet, the French company outsold the Chinese manufacturer by a big margin. Even though they sold the same product ten times as much.
Branding alone wasn’t the difference
The difference was so great that it was thought that branding alone could not explain the outcome. The company worked out that the low price itself might be the problem. Customer research revealed that most of their customers didn’t buy the scarves for themselves but as an elegant gift. Potential customers looked at the low price and thought it was too cheap to be a present.
This is a great example of pricing based on understanding the market and customers. Not pricing based on an industry norm like cost plus margin pricing. This is key to a successful business. A higher price and higher quantity leads to higher profit and greater cash flow.
Price = Value
Price is equal to value. The value to your customer. The price your customer is willing to pay and thus the price your business can charge is always the perceived value in the customer’s eyes.
Many business owners work hard to get their product right and attracting potential customers. But spend little time on the decision that rewards all that hard work – setting the price. One of the main reasons is the lack of education on setting price. Many small businesses will use strategies that are based on the business’s point of view. Strategies such as cost-plus pricing or an hourly rate.
Understanding your customer
When setting the price you must understand your customer and why they are purchasing from you. This influences their perceived value and therefore the price they are willing to pay. You may not be maximising your revenue because you are focusing on your profit margin and not your customer’s perceived value. The silk manufacturer increased their revenue and profit when they understood why their customer was buying their product.
Do you understand why your customer is buying from you? Are there opportunities to change your pricing structure to increase revenue, profit, and cash flow.
The next blog posts will focus on Strategy 4: Debtors. You can find all of the strategies in the e-book ’10 Cash Flow Strategies for a Successful Business’. (Click on the link if you haven’t already downloaded the book).