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David Zweifler 0:02
If you run a company and you want to increase revenues, what’s the easiest way to do it? Well, you could create a new product. Or you could invest in marketing, or perhaps you just hire more salespeople. Still, there’s an easier and more elegant way for companies to maximize revenue, which is hiding in plain sight, just raise the price of the products you already sell.
Most CEOs would say this is easier said than done. Raising prices can increase revenues but raise your price too much, and you end up driving all your business to the competition.
Topline Strategy is a consulting firm that helps its clients figure out exactly how much they can charge. As the name implies, Topline helps its clients maximize revenues without driving away valuable customers.
I’m David Zweifler, and today, I’m speaking with Jonathan Klein, CEO of Topline Strategy, a veteran of Boston Consulting Group, and numerous software companies to discuss price optimization.
Specifically, we’ll discuss a recent article from Topline about the four questions that companies need to ask before they consider a price increase. We’ll also look at a real-world example where a client of Topline was going through the wringer with its value-conscious customers but was able to achieve a major price increase.
Thanks for joining us today, Jon.
You recently wrote about the four questions that a company should ask when they want to see if there is a price-increase opportunity. Can you tell us what those questions are, and the answers that those companies want to be looking for?
Jonathan Klein, CEO of Topline Strategy 2:02
Yeah, so the four questions really come down to how happy are your customers? How differentiated is your product? How important is your product to them? And then how hard is it for them to switch? And the answers to those four questions help decide whether or not you have an opportunity for a price increase.
David Zweifler 2:23
Do all the answers to those questions have to be ‘yes’ for a company to increase its price?
Jonathan Klein, CEO of Topline Strategy 2:34
No, they don’t. What you’re doing with those four questions is you are measuring the elasticity of demand. If you go back to microeconomics, inelastic products are ones where you can raise the price significantly, and very few customers will change. Elastic products are ones where a small price increase will cause a lot of customers to leave.
Those four questions are meant to give you an idea of how elastic your product is. And there are different combinations, which yield different results and different levels of elasticity. The most important one is if your customers are happy. If customers are happy, they are very reluctant to leave because there’s too much risk. It’s working for them, and why would they go somewhere else?
Still, if the product is highly differentiated, you really can’t get it anywhere else. We’ve seen examples of companies with products where their customers had to have one for regulatory reasons. And it was absolutely the only product on the market and their customers hated them. But they raised prices all they wanted because their customers had no place else to go. So you can sort of there are different scenarios, we’re gonna have different ones work for you,
David Zweifler 3:57
Many companies are seeking to maximize revenues, but there are other metrics as well — profitability, market share and others. What determines what metrics a company is going to prioritize? Does that affect your approach to determining an opportunity for a price increase?
Jonathan Klein, CEO of Topline Strategy 4:30
If you’re running a tech business, the way that you want to think about it is you need revenue in order to hire engineers, build your customer service organization, and really service your customer as well. But you also need a lot of customers because that’s the foundation of being market building. And so it’s really a trade-off between these two things. So what we advise clients to do is there are some prices where when you start lowering it too far, you start giving up a lot of revenue. So it’s okay if you take sort of the economic model or that comes out of our type of work and say, I’m going to give off sort of five or 10%, in order to get sort of twice as many customers.
David Zweifler 5:30
There are cases where there’s intentional underpricing with the intention of essentially buying market share. But are there companies that are underpricing with that goal, but they still are not charging as much as they could — essentially just leaving money on the table?
Jonathan Klein, CEO of Topline Strategy 5:57
Yeah, they’ve made a decision to pull in customers or acquire customers, instead of maximizing revenue. But unless they’ve got an unlimited source of capital, and are happy to continue losing money, they can’t service those customers, and then they’re eventually gonna lose those customers. And so at that point, it becomes counterproductive to do that. What you really want to do is think about how you find that point where you get as much share as you can, but really have the base for building a very successful business.
David Zweifler 6:28
There are companies that are probably watching this thinking, yeah, it’s all well and good to determine the potential for a price increase on paper. But, Jon, you don’t understand our customer base. I mean, these guys are rough, they’re brutal. They’re always, you know, fighting us down and haggling on price. Have you helped any clients that are facing that kind of leg-breaking client situation through a price increase?
Jonathan Klein, CEO of Topline Strategy 7:29
I think you said the magic word there, and that was “haggling.” And I’d like to differentiate between haggling and negotiating.
There are certain industries out there — really anyone who’s in a low margin business, which you see it in construction, you see it in retail, you see it in wholesale, and then a bunch of others as well. In those industries, players succeed by monitoring and squeezing costs. And so there is a cultural norm where the companies always try to get the last, you know, nickel out of the dollar, you always try to get 5% off. You never pay retail, it’s just not part of your culture.
So when you interact with those people, those people are haggling. I’d like to differentiate that from negotiating. People who are negotiating are seriously considering not buying from you. They were looking at their alternatives. They’re trying to figure out if they can make a deal. The people who are haggling have already decided to buy from you, they’re just fighting for that last five or ten percent, because that’s their cultural norm.
However, if you’re sitting on the other side of the table from it, and you work and live with those people day in and day out, it is sometimes hard to tell which is which. And so you have customers on one side, beating you up for every nickel, your sales, people on the other side telling you the reason they lost the deal was because of price.
After a while, you think that these guys are super price sensitive. But we’ve done a recent project with a company that was selling into one of these low-margin businesses. And when we started the project, this is exactly what we heard. But when we went and interviewed the customers we realized they could spend significantly more on this software product, in order to get the right product — one that had the best features, had the best service, and one that was the most reliable.
The answer was very, very clear that they were willing to spend more. They recognized that the value of that to their organization was so high and the total cost relative to their cost structure was so low. The clients were willing to spend more and That was mind-bending to our client because they had been conditioned by working with people who are haggling with them for every nickel to get the price as low as possible. And so they thought that they had to be the low-price provider, and that’s the only way to win. And in fact, it wasn’t, it was just about being the best provider, and then understanding that they’re always gonna ask for five and so that reflexive
David Zweifler 10:47
It must have been great for the client to realize they had the flexibility for a price increase. Were they crying when they realized how much money they had been leaving on the table prior to that point, because they were priced too low?
Jonathan Klein, CEO of Topline Strategy 11:07
I would describe it more as them being relieved.
Click to read Jon’s article, Four Questions for Understanding If You Can Raise Price.
Learn how to turn four questions about pricing into actionable intelligence for optimizing your price.