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Dominance and Pricing

October 13, 2005

The more sand that has escaped from the hourglass of our life, the clearer we should see through it. ~Jean Paul

Pricing is a difficult process for which there are no hard or fast rules. For a short time, we have been working with an entrepreneur whose business, for a reason unknown to him, has lost money every year for thirteen years. He is running the business on a shoestring and has now stopped taking a salary in a last ditch effort to keep it going. Obviously, he is having significant financial problems.

I spent a substantial amount of time talking to him about his expenses and discovered that no wiggle room existed there at all. Upon shifting the discussion to revenue, however, the picture changed dramatically. He admitted to me that, in an effort to avoid losing any revenue, he had not raised prices in over 5 years.

The next revelation was that customers had to travel over 50 miles to find another business that provided one of the major services he rendered. Being the only player in town made him the dominant provider of this service and gave him a wonderful competitive advantage. Yet, despite the fact that he was bringing in a good deal of revenue, he still found himself losing money on every dollar he earned. This is just not good business! My solution was to raise prices. If he were to raise prices, the volume of sales would probably decrease slightly, but profits would increase and would require less work. He really liked the sound of that- who would not?

Pricing is an art form, but when you are the dominant product or service provider in the market it becomes much easier. When you would otherwise have to worry about competition coming in and cutting your prices, dominance enables you to set the price at a level that makes it uneconomical for people to seek out a distant service provider. Now clearly, no business should seek to take advantage of their customers, but it is critical that it prices its products and services high enough to insure its viability and long term survival.

A second issue that concerned this entrepreneur was the fear that a price increase would make his customers unhappy. I very sternly explained to him that if he did not charge enough, he would not be around to serve any customers. It was ok if some customers did not like him for it.

Generally speaking, when raising prices you can expect to lose a few customers. However, these are usually the customers that are just a pain in the butt anyway. The real issue with raising prices is dealing with the customer's perception of the increase. If you clearly explain to them the need for the price increase, they will understand.

Now go out and see if you are the dominant provider of any products or services. If you are, make sure you are charging a fair price. Also, it is worthwhile to annually revisit the pricing model used for each and every product or service to ensure it priced correctly.

You can do this!!!