Discussing the issue on the My Business Podcast, Mr Morice – accounting director of Sydney-based firm Prime Partners Chartered Accountants – admitted that pricing “is a really tough one, because you’ve got to look at it from a few different angles”.
“The number one pricing, sort of metric, you do is ‘what are you going to cost?’ And you add a margin in. Everybody’s got to do that,” he said.
“Without that, you shouldn’t be in business, because if you’re not going to cover your costs, get out.”
According to Mr Morice, the next step is to factor in what the broader market is doing.
“And quite often, markets push you down,” he said.
“So, people go, ‘I cannot possibly put my price up’. [But] I ask them why [not]?”
Premium service can justify higher prices
Mr Morice said that, for an average business, the response to this question is that the market would not support such a move.
However, he explained that there are other aspects that can be explored within the business that would actually justify an increase to its pricing.
“What are they doing extra? Where is their work coming from? All these sorts of things can impact your pricing,” the accountant said.
“If your work’s coming from a really trusted source and they’re saying that ‘this person is the best’, then you can charge 10 per cent above everybody else on the market. That’s one way to be able to move your price above the normal market price.”
Pricing review good practice, even if nothing changes
Not all pricing reviews will identify scope to increase a business’s prices, Mr Morice said. But reviewing them can lead to other ways of improving margins – namely cost reductions.
“You can cut your weighted profit. You can do that. You can cut costs to gain more profit,” he said.
“You can’t cut your weighted growth. But profit’s still what I like to look at.”
Doing so involves a review of the business’s operations and functionality to identify potential cost savings – which can come in a variety of forms.
Overcome the fear of saying goodbye
Perhaps the greatest sticking point of all, however, comes down to fear – the fear that most businesses have about potentially losing customers or clients as a direct result of any price increase they impose.
“Most people just have the fear: they’ve known their clients, they’ve known the products for so long that it’s uncomfortable,” said Mr Morice.
He said that his discussions with clients often revolves around testing a price increase, either with a particular group of customers or on a particular product or service.
“People are [often] too uncomfortable doing it in one go,” Mr Morice said.
“So, let’s lift your one up by 20 per cent in this area of your business and see what reaction we get.”
Those results can then be tracked by way of a simple spreadsheet, Mr Morice said.
“And if you’ve lifted your price by 20 per cent, and lost 3 per cent of your clients, you’re now making more money doing less work with less trouble.”
Charge what you’re worth, not what customers dictate
According to Mr Morice, getting the pricing right to achieve optimal profitability will often involve choosing the type of clients or customers you work with.
“Businesses too often let their clients choose their prices and undervalue,” he said.
Mr Morice used the example of another accounting firm that he had worked with around pricing strategies. He had suggested that the firm had scope to increase the prices it charged for completing individual tax returns by 40 per cent.
While the firm initially baulked at this suggestion, it agreed to trial this increase with a select segment of its client base.
“We lost some clients without a doubt, but [the firm’s] revenue went up,” said Mr Morice.
As a result, Mr Morice was able to tell the firm that “now you’ve got less client for more revenue, and you’ve got the clients that value you, because the ones that are price-hunting, they’re going to price-hunt forever. Their life expectancy with your firm is lower”.
Mr Morice concluded: “I may be a bit more expensive than Jimmy down the road who does individuals and partnerships and tax returns, because you’ll just get compliance from them. But when I show that there’s value, I can increase my prices.”
More insights on boosting profitability and efficiency from Mr Morice can be found on the My Business Podcast.