Is It Time to Raise Prices?

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Six months after his own price hike, Fire Eye's Simmons couldn't imagine why he didn't do it sooner. Apparently, he did a good job explaining the increase to his customers -- not a single one jumped ship. "They were very understanding," Simmons says. He's invested his newfound profits into four new employees, freeing himself to pitch new customers. He's landed some large corporate clients, who, he's since learned, didn't take him seriously at his previous price. That's not the only change. In the past, Simmons routinely failed to charge for overtime. Now, if a project requires 10 more hours, it's added to the bill -- and those terms are explicitly spelled out in his contracts. He also altered his billing policies, asking for 50% payment up front rather than taking all of it upon a project's completion. This reduced the cost of his receivables, giving him a subtle increase in margin. "It's been rebirth, a new beginning," Simmons says.

Of course, there has been some fallout. Prior to the price hike, Fire Eye closed about 80% of the projects it bid on; today, the number is closer to 40%. On the other hand, today's deals are coming with far better margins, which is steadily improving the overall health of the company. "I'm only spending time with people who want to play my way," Simmons says. "I'll still work with clients on their budgets. But for the most part, I'm in business to make my life better. These prices are making life better for me."

Do you offer discounts? (Maybe you shouldn't)

Nearly every company offers discounts, promotions, incentives, and giveaways. Such tactics are time-honored ways of keeping clients happy -- and luring new ones into the store.

But you might be giving away the store if you're not careful. And you'd be surprised at how many savvy managers are anything but savvy when it comes to discounts, says Robert J. Dolan, dean of the University of Michigan's Ross School of Business and a business consultant. The problem, Dolan says, is that discounts are offered by different departments at different times for different reasons. Sales and marketing execs give breaks to help close deals, for example, while inventory managers cut rates to move excess stock. It adds up fast. The consulting firm McKinsey studied this phenomenon in 2003, dubbing it the "pocket-price waterfall" -- that is, the amount of money you actually pocket per transaction drips away bit by bit until the small leak turns into a deluge.

How to avoid a soaking? First, get a handle on all of the discounts you offer. Next, think about the customer behavior you're trying to encourage -- or discourage. Do you want people to pay by cash instead of credit? Settle accounts by the end of the month? Don't give away a penny without a clear understanding of what you're trying to accomplish. Another big mistake: grandfathering in discounts forever. Companies often offer discounts to close a particular deal, only to have the client insist on the same low price in the future. What was supposed to be a one-time incentive becomes official company policy. Let customers know when they're getting a special deal. After all, a discount that's expected isn't much of a perk.

Get the price you want -- and avert the dreaded price war

Every salesperson has met one: the customer who cares only about price. High quality? Tell it to the other guy. Superior service? Forget it, the customer says. I won't pay a dime more than I have to.

Reed K. Holden, founder of Holden Advisors, a pricing strategy firm in Concord, Mass., calls them "price buyers," and they're particularly prevalent in the purchasing departments of large corporations -- where they'll often release a request for proposal with a set of specs, pick the lowest bid, and call it a day. Such buyers are a huge pain to deal with. For one thing, they're not particularly loyal because they're always ready to drop you for a lower bidder. They're also not afraid to spark price wars. "These companies want their vendors to beat their brains out," says Holden.

If you have too many of these kinds of clients, you'll never have strong margins. But there are ways to cope. The key is to do business with a price buyer only when you can do it profitably -- if you have excess inventory, for example, a price buyer might be exactly what you're looking for. (Case in point: Airlines often sell excess capacity to vacation-tour operators but don't create extra capacity to serve that market.) Another option with price buyers is to sell only what they're buying. "If people want a lower price, always be willing to give it to them," says Holden. "But be sure to take away some value." An electronics company that Holden worked with, for example, gave one customer the price it demanded -- but only on older technology. Newer, more innovative products were reserved for those willing to pay for them.

Whatever you do, don't tell yourself that you'll take a hit on one sale and make it up the next time. Price buyers rarely change. If you're in the grip of one, walk away. It may seem scary, but remember: If you must get a price buyer back, you can always do it by lowering your price.

Contributing editor Alison Stein Wellner is a New York City-based freelance writer.

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