Most business try to cut costs and boost sales to weather recessions, but what if the best way was to... increase prices?

As crazy as it sounds, bumping your prices in a recession is the best way to immediately increase profit across the bottom line.

Here’s why (and how) you should do it.

1. The best way to boost profits - it’s not increasing sales or reducing costs
2. Why your prices are wrong - COGS + margin = failure
3. Find your ideal customer - double-down on your best buyers
4. Know what they're willing to pay - know your true worth, and charge it
5. Planning for profitable growth - become a superstar in the boardroom

What’s the best way to increase profits?

Price is the value at the heart of marketing, and the real test of your business and products.

It’s the most powerful lever of performance that a marketer can pull; increasing your price by just +1% delivers a +10% increase in profits across the bottom line.

But most companies are not pricing their products correctly, and leave money on the table with every sale.

Why your prices are wrong

Price setting is often done on a cost plus margin model.

Product price = (Cost of goods sold) + (Margin)

This is bad for three reasons:

• It kills market orientation
• It ignores segmentation
• It leaves money on the table

Instead, you need to find out what people are actually willing to pay.

Don’t assume you know what people are willing to pay.

We asked over 180 marketers what they thought most companies would be willing to pay for a brand positioning project. We then ran a quick pricing survey on 60 senior executives how much they'd actually be willing to pay.

Surprisingly, over 80% of marketers price their own services significantly lower than what most companies expect to pay. Think of all that lost revenue and profit...

Are you still confident that your prices are optimal?

(Dear agencies - don’t go changing your prices based on this. It’s quick and dirty data that I’m using just to prove a point)

How to price for profit

There are two steps to finding the right price.

• Identify your ideal customer
• Find our what they're willing to pay

Find your ideal customer

Not all customers are created equal. Some people want nothing but the best. Others are just interested in getting the best deal.

Guess who is more valuable to your business?

Segmenting a market helps you understand what different groups of people actually want from your products or services - how they like to shop, what they look for when deciding what to buy, and how you can best reach them through advertising.

You can also identify and target groups that are profitable customers for your company, and avoid groups that aren’t.

Segmentation is a big topic; check out my guide that explains exactly how to do it.

The right way to segment a market

A step-by-step guide to building a market segmentation that identifies your most (and least) profitable customers in any category.

Read More

Find out what they’re willing to pay

Now that you’ve identified your most profitable customers, you need to figure out what they’re actually willing to pay.

Most of the time, the quickest and easiest way to find your optimal price point is to use a Van Westendorp survey - a short, simple quantitative survey aimed at your target audience.

The survey identifies 4 price points:

• Too expensive, would not buy
• Expensive, but would consider
• A bargain
• Too cheap, would question the quality

Plotting the results gives you the range of acceptable price points within the market.

Here’s how you do it:

_{Watch: Van Westendorp pricing tutorial [07:03]}

Now slice the results by the different segments you identified earlier. What’s the acceptable range of prices of each customer segment? What’s the most that your least valuable customers are willing to pay, compared to your most valuable ones?

The data let’s you see the sweet spot - the maximum price your best customers are willing to pay for whatever you’re selling. Most of the time, it’s significantly more than what you’re currently charging.

Planning for profitable growth

Armed with customer data, you are now in a position to have strategic conversations with the sales or product teams about pricing.

The goal here isn’t to wrestle price setting away from the hands of the sales executives, but to provide them with hard data that shows that they’re under-pricing what you’re selling; often at a considerable loss.

Even a small increase in price will have a big impact on the bottom line, and will make you a hero in the boardroom for driving real business results.

Segmenting the market, finding your most valuable customers and optimizing prices are all part of  our CMO Workshop packages for startups and SMEs, where we help you build a custom growth plan that drives predictable, profitable growth.

_{Watch: Build the business case for brand marketing [00:58]}

If you have ambitious growth plans or are under pressure to deliver strong results on a limited budget, then these workshops are for you.