The article was originally published on LinkedIn in February 2018 by Franciszek Bazyli Georgiew in Polish.
It took me two and a half years of running a business to get through the most urgent issues connected the management and the marketing. Then, and only then, I had time to, methodically, take a long look at our pricing policy.
I believe that this text may constitute a solid base for beginning enterprises or for those who haven’t considered the pricing problem carefully yet.
An exercise that opened my eyes
Although I have already struggled with quotations or negotiations I handle the pricing problem very intuitively. Then, on one evening in October, I was flicking through, with excitement, a great book titled “Scaling Up 2.0”. While reading I came across a very interesting exercise. I would recommend it to you greatly.
This exercise is about filling in a simple chart with the most important business figures: income, costs, taxes and profits. I hope that you know your business data perfectly and you are able to do it on the spot. If yes, then I encourage you to do it right now.
The same figures, different conclusions
The whole point of this exercise is to notice how our profit changes when we increase our prices by a few percents and then to compare the given result with the similar change in costs, in taxes or in any other aspect of running a business.
I was wondering how sufficient our increase in prices should be so the whole exercise was not an illusion. I concluded that it was enough to increase them by 7,5%. In fact, we can aim much higher as this is how B2B business works in the growth market.
The ease with which we included this 7,5% into our chart indicates that we neglected that issue a lot!
I expected that the change in price may positively influence the company profits. I was shocked, though, when it turned out that the difference was up to 50%! I started to think intensively how to raise prices. I began to analyse whether the spontaneous 7,5% was possible, and then it struck me that….
- Our position in the market is really good, and that is based upon many different ratings.
- The market of digital advertising is growing rapidly and is supported by the global most important trends.
- We took the negotiations very lightly. If we had made a specific process then we would have hoped for better results.
- We were so concentrated on rapid increase in profits, in employment and in gaining new competencies that we focused more on how much we would sell rather than on the margin itself.
- It was then when we were in the middle of an intensive process of professionalization of the company, which might lead to the better experience of a current and a potential customer.
- We were in possession of a brand new website and we also were concluding the visual identification, which could convince business partners bigger than SMBs.
- Among all other marketing agencies in our country, we are on a roll, we are well recognized and our voice is well heard.
Taking all into consideration, I acknowledged that 7,5% increase in prices was a real, and even conservative, change. Now, the time has come to get to work.
Starving of pricing theory
Pricing has become my little obsession. After many hours spent on reading articles on pricing, I started to reach for books like “Confessions of the pricing man” or for trade press, e.g. “Harvard Business Review”.
The very first obstacle to be overcome was the psychological barrier. Do higher prices make the sale drop significantly? How to transform them into a better customer feeling? How will the character of our cooperation change? Is it really the right moment to take that risk?
It is funny how the possibility to control prices in B2B sector means being bound by unnecessary worries. The effect of this is, that the most frequent approach to prices means occasional price reductions and sales events, like Black Friday or Cyber Monday, or any of this kind. It is easier this way, but it means that our price is only going down.
Inspirations and anti-inspirations
Being sensitive to prices I started to see more and more inspirations from my immediate environment. Examples and counterexamples started to strike from every side. The seeming price transparency provided by the Internet was one thing. The other – the plethora of pricing strategies developed by big and conscious brands.
One of the anti-inspirations is a bank offer where hundreds of different positions include totally distinct values. It is really hard to compare those offers, though. Would we really like to follow that path? The answer is: No. I realized it myself one day, that a new line on the third page of a constantly updated price list changed the fees to Alior Bank from 30 PLN up to 1000 PLN. They just added international transactions commissions to our card we used to pay, partially, our advertising campaign.
An interesting solution is to be found in offers of telephone service provider in which particular positions are not separated into the components. It reminds the close cooperation with the agency. And the choice is wider. Different brands offer us loyalty cards, hotels and airlines dynamic prices can sell the same places with the huge difference in price, depending on when you purchase them. We also increased the prices when we reached the maximum capacity of our company. The result was that we stuck to them for a longer time. And with the help of the increased budget, we improved the quality of our services.
Linking services sounds like a good direction, too. If we have problems with selling one service we can offer it with other services, resigning from the margin a little bit in favour of the volume sold. What else can we do to make a new B2B service successful, especially, when we are not known for it, but we are sure it’s quality? This is how we handled our first strategies and audits.
The most significant gain may be found where we combine a few elements we can make money from. When configuring a new car, when choosing insurance and the financing method we lose really handsome sums while getting next options. But, in pursuit of satisfaction of a customer, who lives here and now, dealers go even further. Like the criminal underworld, they offer us Lease & Drive service, an offer in which you can pay for using your car and for the above-mentioned elements and after a while, you can return it so they can sell the same car with even bigger profit. Hats off – nice margin with a volume increasing. The first company that might have, presumably, started this trend was Mercedes, which you can drive for a song!
Inspirations forged into actions. Practical hints
I decided, during the last few months, to put all the facts and knowledge gained into practice. If the introduction hasn’t opened your eyes yet, I will present some condensed suggestions which allow you to generate even bigger profit. It took us only a quarter to forge it into procedures and clear guidelines.
1. Increase the price of your main service slowly. In the worst-case scenario, you will, during your negotiations, come back to the starting point. Bigger leaps may mount resistance, cause surprise and they need ample justification for these changes.
We decided to increase our minimum fee for small orders and to increase an hourly rate for single projects. This change was introduced twice with no considerable resistance, and what we got is pure margin.
2. Tend your brand. All the actions connected with expert positioning, branding and communicating values for a customer have not got as direct influence on sales as employing a sales representative. And if that sales representative is to be operating with higher rates then brand building is a must.
In December we decided to add regular PR actions to our social media management. We organized an action #PodzielSięŚwiętami and we prepared the Christmas photo shoot of our team. Activities seemingly of no-sales type send a clear message to the world, form positive and emotional associations with Social Tigers, and they, finally, make the work of our sales team easier.
3. Negotiate smartly. Stop with spontaneous actions. Clearly establish your desired price and absolute minimum and treat them as important boundaries for your negotiations. When setting prices with key players we often forget that they are ready to pay more. The thing is that they do not have to. So, if you let them reduce the price even twice, they will do it. And with the double cut-price, you can do things that will be good for your portfolio at best. It will not be the end. Customers, negotiating from a position of strength, will try to get more and more extra services. And if you give them, they will take! The temptation to conclude the negotiations with an agreement signed and with a dopamine shot for the brain is very strong. In this game, you must be stronger than pawns. If you can’t be a queen then be, at least, a bishop!
We, in Social Tigers, established clear guidelines on how we negotiate and on what our assertiveness boundaries are. We do not try to get everything, whether or not it is in the range of our expertise. That change is of positive effect, for both, our and customers’ side.
4. Do not reduce prices without limiting your scope of responsibilities. It is one of the easiest and most effective methods of struggling for a margin. To be perfectly honest that was a total game changer for me. Remember that if you reduce your price with no reason whatsoever you admit that you plucked the price out of the air.
This rule has been valid longer than these few months described and, being revolutionary, enabled us to take bigger and bolder steps in our business. Apart from cutting down on things that are not necessary for a customer to reach their goal we also started to reduce services, like photo or video shoots, that are a burden mostly for us.
5. Offer a cheaper service available to a greater number of customers. One remark, be careful as not to lower your brand prestige. A good example is an expensive perfume line of a brand that is beyond the reach of a regular customer, or cars of prestigious brands available as cheaper models with the same precious logo.
We decided to develop training services for people and companies who are not able to cooperate with a bigger marketing agency. We also offered the possibility of cooperation, under limited conditions, to smaller enterprises. The results are very good because our precious margin is not eroded!
6. Offer bundles. If you care about your development and/or selling new products and services you need to include in your bundles those that sell. It also concerns services that would not be willingly obtained by a customer.
When cooperating with big companies we observed a huge gap when it comes to marketing strategies and action audits. It was not easy for us to sell a new service we were not associated with. We sold the first ones in a different way. We offered a strategy included in a package. That made our further cooperation easier for us, and we also gained an additional profit and could prove ourselves.
7. Do not fight the price. Otherwise, you will wake up one day in the reality where you pay the salary, cover your costs and obtain no margin. Finally, a bigger player will optimize their cost and they will sweep you out of the market.
In case of marketing agencies, many challenging duties are carried out by interns which allows reducing the prices. In Social Tigers, we do not want to optimize costs in this way and compete with prices with companies that offer cheap services that do not work. We prefer high-quality services, real business support and this is the model we strive to sustain.
Higher prices and a customer’s interest
One of the most important decisions I have ever made when running a business was the one on specifying the pricing policy. Thanks to higher margin we can offer better paid and well-trained team. We can also try to surprise pleasantly because our costs are not that firm. We forge our profit into investments that enhance the quality of our work, they also increase our specialization and help us to gain new perspectives in the company.
To sum up, the margin is for Social Tigers like a wave, the higher the better surfing experience. We wish you pleasant surfing, too!