In a letter to shareholders in April, Amazon CEO Jeff Bezos shared, for the first time ever, the total number of Amazon Prime members (100 million). Then less than 30 days later, Amazon CFO Brian Olsavsky announced a price increase of $20 for Amazon Prime memberships in the United States, raising the annual price to $119.
This move was smart for several reasons, not the least of which is the impact to the bottom line. While there is no clear breakdown to the number of those 100 million US Prime customers who are going to be paying an extra $20 more per year, Kantor Consulting estimates that number to be 56.9 million members. This means that this $20 price increase equals an additional $1.14 billion in revenue for Amazon. Even if their costs have gone up, this 20 percent price increase has a leveraged impact to profits from its retail operations.
Your company should steal a page out of Amazon's playbook and consider doing the same thing -- raising prices.
If the scale of Amazon scares you, let's look at a much smaller company who used this same idea to increase their profit margin by 20 percent. Quality Property Maintenance (QPM), is a $1.6 million a year specialty firm that manages common area maintenance for homeowner associations in Oceanside, CA. (Disclosure: QPM has been a business coaching client for over three years.)
When QPM decided to raise pricing by 8 percent across the board, they didn't just increase profit by 8 percent, but rather by over 20 percent. How is this possible? Just like Amazon, the lion's share of the price increase dropped to QPM's operating profit margin.
So how do you apply this principle to your own company? Begin by answering this question: How did your company set its pricing to begin with? If you're like most companies I work with, you set your pricing back when you first launched your company, and then rarely revisited it. That's what Mark did. When he started QPM over a decade ago out of his kitchen, he priced himself at the bottom of the market because he was scared he wouldn't get clients otherwise.
But now, over a decade later, QPM is a proven entity with an excellent reputation and robust service offering. His clients recognized this and happily went along with the price increase.
Is the same challenge hurting your company's profitability? Did you set your pricing years back and let that low level anchor your price points?
Now here you are today -- a proven entity with a solid reputation and real track record -- but if you're not careful to revisit your legacy pricing practices, you'll likely still continue to be on the low end in your market.
If you are scared to raise your pricing in a big way, consider one of the following incremental steps you can take that move you in this direction.
First, immediately reign in the standard discounts and unpaid add-ons you allow your sales team to use to "close the sale". If your sales team relies on discounts fifty percent of the time in order to close a sale, and the average discount is 5 percent, then ending this practice is the financial equivalent of a 2.5 percent price increase. If your business operates at a 30 percent operating profit margin, this 2.5 percent price increase means an immediate lift to your bottom line profit of 8.3 percent.
Second, conduct a quick margin analysis by customer and sort your customers into A, B, and C buckets based on profitability. Raise your C bucket customers pricing. Depending on how much pricing resistance you get, move on and raise pricing on your B bucket customers and potentially even your A bucket customers.
Worst case scenario, you may lose some marginal C bucket customers, but that frees up resources for you to go out and replace them with much better A and B bucket customers.
I know Amazon's move was bold and can be scary for you to imagine doing. Regardless, if you want to grow your company it is vital that you put your pricing on trial and make a smart, deliberate decision. Amazon made a brilliant decision, and you should copy it to immediately increase your profit margin and bottom line.