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New business starters face a lot of obstacles on their way and often ask themselves: “Should I raise my rate?” Raising the rates can be a double-edged sword, both for the existing and new businesses. There are pro’s and con’s of raising the rates, but the biggest fear of all businessmen is losing current customers.
On the other hand, undervaluing the product or service, especially for new business starters, can be as fatal as raising the threshold too high. Here are the reasons why raising your rate is a good option for new business starters and consultants. On the other hand, some possible risks and solutions are provided as well.
The disastrous effects of undervaluing.
We will first analyze the fatal effects of lowering the rates in order to understand the importance of charging the proper price for your product or time. In consumer behavior science, there is a term known as anchorage price.
Simply put, once the customer buys a product at a certain price, he becomes “anchored” to it. More importantly, the client anchors the product value to the price he paid for it. Now, imagine undervaluing your product in order to attract customers.
We will assume you decided to undervalue your new digital product only for a short period of time. Your goal is to gain income as soon as possible and to spread the good news on your product. This is a legit aim. However, it should not be prolonged as your business will suffer some serious losses over a long period of time. Additionally, as previously explained, the new customers will become anchored to the low prices and, even worse, they will associate your product to lower class digital products, which is something you certainly don’t want.
This can have some serious consequences on the acceptance of the new prices of your product after raising the rates. Associating your product with higher class digital products in the start could be a more effective strategy.
A similar case known in history is the breakthrough of black pearls on the market. In the beginning, this today very fashionable and exclusive products could not find interested buyers. No one wanted black pearls! After placing them in the same league with the desired white pearls, the demand for the black ones abruptly increased. The new jewelry quickly became anchored to the precious and rare diamonds.
Should you raise your rates?
The answer to this question depends on the worth of your product/service. If you are sure that the service you are offering or the product you make is worthy, quality and deserves to be paid for, raising the amount you charge is a logical and beneficial decision. This might sound like a cliche, but when forming your price, ask yourself whether the amount you plan to charge is worth the time you invest in the production process or not. Answering this simple question will help you answer the more important question raised in this paragraph.
When is the best time to raise the rates?
You can raise the rates either in the beginning, anchoring your service or product quality to a high class and earning the true value for the worth of your product, or after the initial product launch and test phase is over. This depends on numerous factors, such as the existence and strength of the competition, strengths of your product, opportunities in the market and consumers’ responsiveness to what you offer.
How much is not too much?
We talked about undervaluing the product/service and the consequences of such actions. However, raising the rates too much will certainly be counterproductive. Researching the market prior to raising the rates is the key step in forming the best rate.
Competition analysis is important as their prices are among the top price shaping factors for your product or service as well. Speaking of which, try to think about the strengths of your product. Competitive difference characteristic for what you offer can dictate raising the rates regardless of the competition.
When talking about services, consultants should know that including the total price and hours needed to complete the service is always a good option. In this way, both the user and the consultant will have precise insight into the value and hours spent for consulting.
How to increase the rates?
The incremental increase in rates is proven to be the most effective way of raising them. This is especially relevant for new businesses that had already made the mistake of a serious undervaluing of a service or product in the very beginning. Abrupt rates increase will usually lead to rejection of the product or service by the potential clients.
Losing customers is something you certainly do not want. Set a rational period of time over which the rates increase is acceptable for the development of the business. Another important tip when talking about the best way of increasing the rates is being fair to your customers. Keeping them informed is rule No. 1.
Think about new customers.
After raising the rates, a certain number of your current customers will inevitably leave. It is easier to keep the old than finding a new client. This is why many businessmen answer the “Should I raise my rates” question with “Not yet, I will lose my customers.” However, raising the rates and looking for new customers is better than sticking with the old ones and undervaluing your service.
Additionally, you can choose to test both the clients and the market. Keep the old rates and the old customers over a certain period of time and, in the same time, test the new customers with new rates. In this way, you will see what are the limits of your product and how responsive the customers are. Additionally, you will know whether the new rates are too high or not.
Constant rates revision rule.
After the kick-off rates are set and the product is launched, the new business starter will know whether the rates were set too low or too high. Trial and error is allowed. Learning from mistakes is the most important lesson for new businesses. After testing your business success with raised rates, consider increasing them for true. However, once you find the perfect rates, don’t make the mistake of sticking to them for too long. Increasing the rates according to your product and service development is a logical path to follow. Each time you notice that your workload increased, consider raising the rates. This is almost always a sign that your product or service could bring you more profit.
In conclusion, the worst thing new business starters and consultants can do is undervaluing their work. Being paid less for a quality product or service will not pay off in the long run. Additionally, no one wants to be known as the cheapest one in the market, as the reputation built in the beginning will probably follow your business in the future. Therefore, the answer to the “Should I raise my rates?” question should be “Yes, in a smart way.”