Raising Prices Will Save Your Business! Here's How To Do It...

Hey, everyone, it's Mike Andes, and you're listening to the Business Boot Camp podcast. Today I'm going to be sharing how you can raise your prices and increase your margins by using something I learned in my MBA class. Before we get into today's show, though, a big thank you. Today's sponsor, which is Gusto, if you haven't already, go to gusto.combootcamp try out their software completely free for 90 days. You can do direct deposits, you can do all of your payroll needs, reporting everything that you're probably needing for PPP forgiveness right now or your Eidl. All of that stuff is very, very simple in Gusto, and it's cheaper than all the competitors. Check it out Today, go to gusto.combootcamp and try it out for free. Now, today, I'm talking about something that I learned in my MBA class and is one of those few things that probably made my whole MBA worth it. Most of you know, I look back at my MBA and wonder because I paid it out of pocket. So, like, it was expensive. And sometimes I doubt whether or not it was worth the time and effort. I. I was doing it at night while I was starting Augusta Lawn Care, but there was definitely a few things that I picked up on. And if it's just for those few things, maybe it makes it worth it for the rest of my life. And so one of the things I learned that has always stuck with me is an economic conversation, economic principle that in order for a transaction to take place, value must be greater than price. All right, so what I'm talking about, this today, goes for any product, any service, any industry, regardless, this is when a transaction takes place, as long as value is greater than price, the transaction can take place. How I think about this is if this is like a continuum here and value is here and price is here. All right, as long as value is. Is higher than price, that is when a transaction takes place. In my mind, this right here, this difference between the value and the price is the discount. All right, so that is why when you go to a store and you there is a 20% off discount, what's happening there? All right, so the price for a T shirt, for example, the value for you might be $20, and the price is $25.

In this scenario, you are not going to buy this T shirt because the price to you is higher than the value. And this is just an overall economic concept. If the value to me is not great in the price, I will not buy it. Now what happens is the store comes along and is like, hey, we're going to discount this and we're going to take the price all the way down and to $15 and this is going to be a discount.

Now, this discount term, this is probably not an economically correct term. This is how I think about this difference here. This is not an actual term in economics, but when it comes to here now, price at this new discount of $15 is lower than $20 of the value. Therefore, in this scenario, because the value is higher than the price, the transaction will take place. Now, how can we use this in our businesses to actually make a difference? This is a lot of times what I use for landscapers, and I'm going to use that analogy for now. But again, this can be used for any sort of industry to raise your prices. Because a lot of people go out of business because their biggest lever is their prices and their prices are too low. So they might charge $40 per hour for their massage therapy services. Now they can go out and spend a bunch of marketing and try to double the size of their business in order to double the revenue, or they could double their prices. And as long as they keep half of their existing customers, they would not decrease in profitability or in revenue, let alone profitability. So here's the concept is if I am producing this much value and the price is just slightly lower, all right, this is where most transactions, this is an equilibrium, and that is price and value traditionally become equal, as close to equal as possible, because we as the providers or the producers, we are selling services, we are selling products. We, we want to maximize the price, but then the consumer has to have the price slightly lower than the value. So there's always this equilibrium. Eventually it balances out, all right. Now, there might be price pressured upwards or downwards, there might be value pressure upwards or downwards, but eventually this equilibrium basically happens. That is, value is slightly higher than price, which allows the transaction to take place. Now what happens is when people start looking at their numbers like, look, my biggest lever is price. If I want to double the size of my business, I can spend a lot of marketing or I can just double my prices. And then this is the problem. You can't just double your prices. You can't just move price up to here because now your value is lower than your price and transactions will not take place. And this is what I push so many landscapers to do and so many other business owners, regardless of what industry and is, I still want you to increase your prices. I still want you to have a premium product and Increase your prices. But in order to do that, in order for that price equation to work, your value needs to come up higher. All right? Where now your value is still greater than your price and the transaction will still go through. In this type of a scenario, you're going to be charging a premium price, but you're going to be charging, you're going to have premium value. Now the big question is how do you produce value for your customers? Now this comes in the form of a lot of different things. Number one thing is going to be professionalism, alright? And this comes in the form of a lot of things. Being on time, having a great website, having a great brand. I don't even know if I put professionalism right. But all the different things around professionalism lead to greater value. Organization. I can just list on and on and on. Organization. If you go to a store that is disorganized, you're less likely to pay premium prices because there's less value. Because when they organize things, it's producing value for you as a consumer because you can find what you want fast. When you go to an Apple store, they there's not a ton of stuff everywhere and a bunch of clutter. It's very clean. It's very easy to find the different products that they use and products that they sell and that produces organization and that increases the value. That is why Apple can charge a premium price. Other ways to look at value, let's do uniforms. If you have a service based business, uniforms are gonna be great. Your team is going to be a level of value to the customer. Are they background checked, are they professional, do they speak English? All these different things that are going to produce value for the customer. In the landscaping world we talk about having uniforms being insured and bonded. When you go to a customer's property, that's going to produce a lot of value. And when you increase value, there's going to be people that are willing to pay the extra price. Now the problem with a lot of people is they focus a bunch on value, but they don't raise their price.

And what they're doing is they're having the price down here.

But the value is way up here. The problem with this is they're running a discounted operation. And a discounted operation will almost always fail. If you look at a lot of the discount brands, the ones that are really cheap and they're not the ones we know about, they're not the ones we're willing to pay premium prices for and they have low profit margins. Now with Scalability and size. Someone like Walmart operates on this high value, low price proposition and they've done very well. But in order to make that work, they have to have massive scalability and they're operating on razor thin 1 to 2% net margin. That is very, very difficult for small businesses. Let's just be very clear. A lot of people think, oh no, I can scale this up, I can produce high value, get lots of customers and eventually the price will catch up. And they're looking at people like Walmart as an example. Walmart is multi billions and trillions of dollars in revenue. We are not even close to that. As small business owners, we need to be thinking about how do we raise the price by producing higher value and how do we get this number so we're no longer a discount shop. And and instead of operating on 1 or 2% margin, we're operating on 15 or 20% margin by having this price as high as we possibly can. Now you're asking yourself, well, what if I want to grow really quickly? If I'm not really too worried about having a lot of profitability, but I'm really interested in growth. I want to hire lots more employees, I want to get more trucks or I want to get a bigger office or I want to whatever you're doing, increasing your store size, increasing the amount of trainers at your gym, increasing the amount of therapist at your physical therapist store, whatever you're doing, how do you lead to growth? Is simply two different things you can do. You can either a lower the price or you can increase the value. And I would push you very, very hard to always think about value first. How do you increase value before you lower price if you want to grow instead of taking the easy way out? Because it's always easy. If there's ever a transaction, it's like when you're bidding on Craigslist or someone on a secondhand market. It's very easy to lower the price. Cause you just want the transaction to take place. You're like, man, take it for 150 bucks. I know I put 200, but just take it for 150. What you're doing there is you are lowering the price, you're discounting in order for that transaction to take place. Because now value is higher than price. And that's the easiest thing for us to do as business owners because price is very easy to change. If this is ever close, if this transaction is ever close and someone's like, well, it's kind of above my budget, can you do any better and they start haggling with you. What that means is that the value and price continuum is very, very close. And so it's very easy for us as business owners to do one thing. Oh, yeah, no problem, we'll give you 5% off. And immediately it reduces the price and the value is higher than the price and the transaction takes place. Because whenever value is greater than price, the transaction takes place.

And this is the easy thing to do. And so many people fall into this discounting method and you might say, oh, I never give discounts. If a customer asks for a discount, I never give a discount. But if your rates and your standard pricing is even still lower, you are in a form of discounting. What I would encourage you to do is do this instead of reducing your price and be like, Mr. Jones, we'll give you 5% off instead. What I'd rather encourage you to do is tell Mr. Jones about your value proposition. Tell Mr. Jones about how professional you are and how you're gonna take care of him through the whole sales process and how your team is gonna be uniform and you have a customer service guarantee and you have a satisfaction guarantee and, and that you have 100 five star reviews and that you have one day shipping or you have all these different things that add value to the customer. Because what happens is this differential that you no longer had to do by X' ing this off, this difference in the discount you did not give becomes sheer profit. And you didn't have to do anything extra, you didn't have to spend more money. You don't have to give up any dollars. You, you just have to increase value. Now, increasing value can take money. Increasing the professionalism of your team and your staff, having uniforms, having organization, having a great website, all of these things do cost money. But one of the beautiful things about increasing value is you get exponential returns. In other words, if I build a great website or I train my staff, I have a day where we do a bunch of training that costs a lot of money. But I get infinite returns because in the future I've trained them, they have that knowledge in their mind. If I organize my store layout, I make it more streamlined. If I raise the credibility of my store or my therapist or whatever, my team, if I do all these value propositions, a lot of these things you do once and then you don't have to touch it again, but for a long period of time. So it might cost some upfront money, but if I can increase value, it gives me price flexibility. And price flexibility is what you want because you can move price around in order to maximize profit or maximize growth. Now, this is a very different episode that I'm usually recording, but I hope it gives you a little bit of a visual in terms of what you should be thinking about in your business. The easiest thing to do is change price. Very, very easy. Very, very easy to discount services and discount your products. Value is long term. It's difficult to change. You can't just flip a dime and increase value. But if you've been sold and you have been investing in the value proposition of your business, when someone gives you the price question, they ask, oh, can you give me a price discount? That's when you can rely on your value and in the mind of the customer. Again, this is all about perception. The value to the customer needs to be increased. When someone asks for a discount now, they ask, hey, can you give me a discount on that? Instead of thinking, oh man, how can I lower the price? Ask yourself, what can I do to increase the perceived value in the mind of the customer so that this transaction takes place? And if you're wanting to raise your prices, increase your value first and you'll be able to do it every time and increase your margins. I hope something was said, I hope it wasn't confusing. If you like these type of explanations of a little bit deeper concepts, make comments below and I'd love to answer any questions. Thanks so much for listening to Mike Andes on the Business Boot Camp podcast. Until next time, be great. Nothing else pays.