Increasing revenue by increasing prices

Price is what you pay. Value is what you get – Warren Buffett

Now that we’ve spent two weeks tracking our time and calculating our real hourly rate, we can identify which clients are paying below average and increase their cost of service. But before we go demanding more money, we need to understand the concept of pricing power.

Generally speaking, if a company does not have much pricing power, an increase in their prices would lessen the demand for the service. So let’s take a look at factors that affect our pricing decisions.

Customers

“How will buyers respond? Three important factors are whether the buyers perceive the product offers value, how many buyers there are, and how sensitive they are to changes in price.” (Principles Marketing, 2009)

Price Elasticity

“When consumers are very sensitive to the price change of a product—that is, they buy more of it at low prices and less of it at high prices—the demand for it is price elastic.” (Principles Marketing, 2009)

Competitors

“How competitors price and sell their products will have a tremendous effect on a firm’s pricing decisions. The availability of substitute products affects a company’s pricing decisions as well.” (Principles Marketing, 2009)

Economy

“The economy also has a tremendous effect on pricing decisions. Factors in the economic environment include interest rates and unemployment levels. When the economy is weak and many people are unemployed, companies often lower their prices.” (Principles Marketing, 2009)

With the above in mind, let’s take a closer look at our business model and explore how we might be able to raise the cost of service.

Firstly, I service domestic and commercial clients. My current domestic prices are set at the market rate and increasing them will be difficult as there are so many other cleaning companies operating in my area. There are also many companies that are willing to compete on price. Therefore, we’ll focus on the commercial clientele.

I know that my customers value the service that I provide as I have surveyed them in the past and received great feedback.

Since my commercial clients make good money through their business’s, they shouldn’t be too sensitive to a increase in the price of service, as long as it isn’t too drastic.

My competitors currently charge more than me per hour for a commercial cleaning service and quality and value for money differ with each company. I also service the small business market which generates lower revenue than medium to large sized business’s. If I am to increase my price per hour I need to make an educated guess as to which clients can afford the price rise.

Lastly, Australia’s current economic conditions and outlook are fantastic:

“Population throughout Australia is growing and interest rates are at an all time low (although expected to rise in July 2019). Unemployment is also low, while wage growth is steady.” (Focus economics, 2018)

Now we’ll refer back to the time tracking data from week 1 and week 2, identify which clients are underpaying for their service and whether or not they meet our criteria for a price increase. Finally we’ll determine how much to raise the price by. This is outlined in the table below:

Week 1
Day Type Previous amount charged ($) New amount charged ($)
Sunday
4 Commercial 90 99
Monday
6 Commercial 53 55
Wednesday
10 Commercial 27 35
Week 2
Sunday
3 Commercial 90 99
Monday
4 Commercial 53 55
Wednesday
8 27 35
Totals 340 378
Difference $38

By increasing the price of service for the above clients, we’re able to generate an additional thirty eight dollars per fortnight or $76 per month. We’ll add this to the $92.88 per month that we’ve already saved by cutting costs and we’re now putting an additional $2026 in our pocket every year.

In next week’s post we’ll look at further improving revenue by increase our number of clients.

Leave a comment if you have anything to add to the conversation!

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