Want to grow your business? Then make more money…
There’s a dangerous myth out there that if you want to grow your business / sell more of your product or service a great way to do that is to lower your price. Going back to Economics 101 that’s the essence of Supply and Demand.
The problem is that in the real world, that academic theory doesn’t hold up very well for most businesses. It is true that it’s easier to sell at a lower price point – that’s the demand side. But it doesn’t take into account the supply side of the challenge. Unless you have meaningful economies of scale, it’s always harder (and likely more expensive) to make and sell more.
More isn’t always better…
Let me give you a real world example. I met a business owner the other day who’s had their own business for over 10 years. This business started, as many do, with an employee working for a much larger company and recognizing that they could deliver the same (or better) outcomes with better service. And since this new start-up didn’t have the overhead of the large established business, they could also charge less – which would make it even easier to sell.
All of that makes sense – and if you’re just starting out it’s a comforting idea that helps you reduce the perceived risk of jumping out on your own. But eventually that lower price is going to be a problem for you.
For one thing, as you start to grow you are going to end up with increasing costs and overhead. Maybe not as much as your previous employer, but certainly more than that first year or two when you were on your own. Secondly your value proposition is based on offering a better solution and better service… and those kinds of things cost money, especially as you start to grow. There’s a reason a lot of companies cut corners on quality and service – it generally means they’re spending less.
The Good News…
But this story has some good news. In the case of the real world example above, they’ve been successfully in business for over 10 years. They have a long list of happy customers and they get most of their business from repeat buys and referrals. That’s because they’re offering better quality and better service (and possibly because of the pricing).
If the market they’re in truly values quality and service, then they can (and should) raise their prices. I’m going to pay more for a steak at a great restaurant than I am for the same steak at the grocery store. And I’m okay with that because that restaurant will cook that steak much better than I can and give me a great dining experience on top of that. I value that and I’m happy to pay for it.
That’s the same equation for this business owner. They should be charging a premium for better quality and service.
What’s the point?
Why is it important to raise prices? Obviously it leads to higher profits – which is always a good thing. But in this case it’s even more important because this business owner has been successful for a long time, but they haven’t been making much money – and eventually that’s the kind of thing that will wear you down.
When profits are low business owners tend to spend more personal time and effort in the business, doing the work. In the case of our example, the owner is typically working 50 to 60 hours a week and any vacations include plenty of ‘work’ time – so the owner never effectively gets away.
With more money and a stronger bottom line, the owner could afford to hire or outsource more of the work. That not only frees up the owner’s time, but it also creates the opportunity to scale the business by enabling production and revenue that’s not reliant on the owner’s time.
And ultimately that’s the only way to truly scale a business. You have to find a way to create an engine that can work without you.
What about you?
When’s the last time you thought about your pricing? As the business owner, are you personally ‘touching’ most of the business transactions? Can you afford to bring on more bandwidth for your business? Or are you just throwing more of your own time and energy at it? Nothing wrong with that in the first few years of a business, but at some point, if you want to keep growing, or if you just want to enjoy more of your life, you need to figure out how to make great outcomes happen without you.
What do you think? Does this resonate with you? We’d love to hear your thoughts – leave us a comment.
Shawn Kinkade Kansas City Business Coach