Just Raise Prices - Part 2
Guesswork Unveiled, Issue #6
If you missed Part 1 last week, I set the stage for what it actually feels like to be the new owner of a small business. Raising prices sounds easy in theory, but first you have to (re)build the confidence to do so.
To raise prices effectively, there are three pre-requisite thresholds to meet:
Understand Your Business Value Proposition
Run Tests
Believe You Can Sell
Let’s dive right in.
Understand Your Business Value Proposition
When folks talk about their business, they tend to focus on the industry-specific elements of it. I want you to think about your business in a more abstract, industry-agnostic way.
Take an electrical contractor.
The demand is not actually “electrical issues in the house” — that’s a driver of overall industry demand, but it’s not a driver of demand to YOUR business.
The reason the demand comes to your electrical contracting business may be one of the following:
Customers in your area struggle to figure out who is qualified to solve their problems, and your branding provides them with confidence that you are reputable and trustworthy.
Customers in your area are very budget-tight, and you’re able to solve their problem for the lowest price.
If you are a commercial electrical contractor, and the buyer representing the customer is an employee of a larger organization, maybe you just make their life easier. You are the quickest to get them a bid over email, they don’t have to meet you in-person, you’re the quickest to send them a COI & W9, and you’re the quickest to send a clean invoice after the work is done. Your team doesn’t smoke at jobsites, they look professional, and they don’t piss off other contractors.
You can see that these versions of business value proposition are not industry-specific, but rather reflections of your branding, operating structure, or systems.
The Yale SOM team has a great case study on price increases (thanks to the couple readers who flagged it for me) — the whole thing is worth a read, but I particularly enjoyed the section on Pillars of Pricing Power, shown in the table below:
The case study dives into each of the above elements in more detail, so I won’t rehash their words here. But even just the titles should give you an idea for how to understand your business value proposition, as it is inextricably tied to your ability to raise prices.
An anecdote I think of often — a few years ago, in my final days in private equity, one of the investment banking groups I used to work with took me out for drinks at the St. Regis on 5th Ave in NYC — the site of the famous King Cole Bar, where the Bloody Mary was supposedly perfected.
I remember ordering a St. Regis-branded Old-Fashioned, at a jaw-dropping ~$32 price point. This was before the last few years of inflation — even in NYC, even at a 5-star hotel bar, this was a stunning price to me.
As I looked around the bar, it was clear that not a single soul here was paying out of pocket. They were likely all on expense accounts, taking clients out for drinks or being taken out for drinks. The business mind in me couldn’t help but wonder about their pricing power in that moment. What allows them to charge $32 for an Old-Fashioned?
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