How price sensitive are your customers?

I’ve come across so many people in business who say that their customers are completely satisfied with their service but are still reluctant to put their prices up, I felt that this warranted a blog to discuss the finer points of the supply, demand & pricing equation.

Someone once told me that in life if you want something fast and cheap then it definitely won’t be good, if you want it fast and good then it won’t be cheap, whilst if you want it good and cheap then you had better be ready to wait a while. To get to the crux of the pricing dilemma we need to understand where a business sits within this framework of quality, speed and value and more importantly where it is perceived to sit by its customers.

You may be asking “why is it so important to get the pricing right?” but consider this. If you said to someone in a steady job that they could work less hours for the same money or the same hours for more money, then they would probably assume the only way to achieve that would be to move companies and find another role. For small business owners however this effect can be achieved with relatively little effort and could result in a drastic improvement to their lifestyle.

The key obstacle to overcome is that to many small business owners the concept of losing a customer is unthinkable and the survival instincts that got them to where they are take over and tell them that they need every scrap of income to stop their business going down the pan. These survival instincts only work if there is a surplus of time and capacity, but eventually the concept of opportunity cost applies and for every customer that’s handled at a sub optimum fee time could be spent marketing to bring one on that is better value.

A customers susceptibility to accepting price increases is always going to come down to the type of industry a business is an and its competition, small firms that offer a one of a kind service will probably have more flexibility than a leading supermarket because it’s much harder for the customer to compare them to anything else on a like for like basis.

A good way to test the water with customer price sensitivity can often be to introduce a slightly enhanced or premium service in a business at a higher price and see what the customer switch over is. If it turns out that most clients are ready to switch over to the new service then it could be a good indicator that they will consider paying more for the regular product range and price isn’t such a big issue to them.

There’s no denying that price increases will always need to be handled discretely and in a tailored manner depending on the client. As an alternative to hiking up the fees at random intervals it is often a better idea to build it into the culture of a business and have a modest pricing target to achieve every year. However the real success factor in any pricing strategy is how well it can be justified to customers and whether they still perceive the services to be good value.

To pave the way for increases it can often be a case of a business promoting its success stories to its current client base, for example if a client’s business is improved somehow then making sure the client knows what its worth in cash and time. Later when they are comparing prices against alternative suppliers they will hopefully also factor this value generated into the decision.

Accountants can provide some great advice when it comes to pricing as they are trained to understand margins, however it’s still important that they factor in the long term objectives of the business as the pricing strategy needs to have some consistency to avoid alienating loyal customers.

 If you are a small business located in or around Northampton than please feel free to contact us at Northants Accounting with any pricing related queries you might have.

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