Why increasing prices is important
Rosie Chong:
So Ben, why do you think that increasing your prices is so important?
Ben Lai:
Why is increasing prices important? Well, it depends. If you are positioned on very low pricing, but your product or your service is very high in its standard and the quality, then there’s a big gap, and that can affect a lot of different things. Firstly, the most obvious one is you’re going to get less profit, right? The second thing is that the people who are buying your service won’t know that you’re a premium provider because you’re not positioned that way. And so when they’re engaging with you for your service, their perception of the quality of your service is going to be a lot less, even though objectively you might be very good at what you do. So perception management is exceptionally important.
I would say the third reason is because of inflation; fuel prices, vegetables, fruits, everything’s going up. A lot of business owners haven’t updated their prices for a long time, sometimes five or more years. What that essentially means is they’re going to get a 4 or 5% pay cut every single year. So from that perspective, there’s a lot of reasons, but it depends on your circumstances.
Rosie Chong:
Cool. That’s awesome. So I think to me, it’s basically keeping up with the times and keeping up with inflation and everything that’s changing as the years go on. And then also really just knowing the value and the work of your service or your products and pricing that appropriately, and I guess not undervaluing yourself.
Ben Lai:
Yeah, absolutely. It’s something that a lot of people, especially women in business, they struggle with. So a lot of my clients are female entrepreneurs, and sadly to say that they’re usually the ones who undervalue themselves. So I’m really happy to help them out, to believe in themself and to articulate their value.
What’s stopping people from understanding their value?
Rosie Chong:
I love that. I mean, as a woman who is trying to start freelancing or start going on my own solo journey, just to get a little bit of a side hustle going, what do you think it is that’s stopping people from really understanding their work? It’s something I struggle a lot with. So what do you think is really helping people to combat that?
Ben Lai:
Yeah, absolutely. That’s a great question. Imposter syndrome is a well known problem.
Rosie Chong:
Oh yeah. Totally.
Ben Lai:
So firstly, it’s understanding and being more objective about yourself. I think one of the challenges there is that we want to be humble. A lot of us believe that being humble means underplaying how good we are, and not promoting ourselves when the opposite is true. True humility is actually having an accurate understanding of where you are. So a person, like a CEO can say, “I am the most powerful person in the company,” and if they’re not being a jerk about it, that would be 100% true, right, and they can still say that with humility. There are some other conditions as well, but predominantly humility is about having an accurate self-assessment.
My second suggestion would be to not place the value of your services based on you. You base it on the value that you’re giving the other person. This is called value based selling. The way you do that is you help the client to understand what they’re going to get from your services. So for me, it’s a little bit easier.
I do price consulting and I do sales coaching. So the natural result of this work is that they’re going to get a massive return on investment. They’re going to close more sales, they’re going to increase their price, increase their profitability. This is very, very measurable, very easy to show that in three months I was able to get them 10 times their return on investment.
So for other services such as yours, you need to be able to translate what you do into what they care about, whether that’s return on investment or whether that’s time saved, whether that’s stress saved. Whatever it is, you have to be able to translate into what they care about, and that’s how you show the value of what you do.
Rosie Chong:
Amazing. So it’s basically one, fighting off the classic imposter syndrome. I think so many people that are trying to put a price on their service or their value, anyone is guilty of that in that world. But then also really disassociating from you and your work and actually trying to make it more tangible about what value can I offer? And making that really personalized for the person you’re selling to, essentially. I think that is so great.
Ben Lai:
Absolutely. Just be other-centric. I think that’s one of the best things that you can do.
Is increasing prices greedy?
Rosie Chong:
I love that. I think something that a lot of people struggle with as well is this idea of increasing the prices can be considered greedy. A lot of people who are quite humble struggle with the idea of, oh, well I don’t deserve this money, or why should someone pay more for me? How do people overcome with this idea or start to align increasing their prices with still maintaining an element of being ethical?
Ben Lai:
That’s a great question, and I think a lot of people, including myself, struggle with this initially. It comes a lot from the introversion, the people pleaser. In a way, if you think about your upbringing, a lot of that has an influence on how you think about money. What I find frequently is that the people with entrepreneurial parents have no problem with this. But the ones who are in employed roles, they’re the ones who tend to pass on that mindset to their kids, and they struggle a lot more with this idea of profitability and so forth.
So from the perspective, I think being able to understand the true nature of money really helps. So there’s this saying that money is the root of all evil. It’s actually complete a misquote, and it doesn’t make any sense if you think about it, otherwise we’re all evil. But the actual saying is from the Bible. It says it’s the love of money that’s the root of all kinds of evils. So when you put money above human wellbeing, you make it more important than your family and other people, then that’s where it becomes a problem.
But in actual fact, what I teach my clients to do is to think about money as a certificate of service. So when you do something valuable for someone else, they are giving you these pieces of paper or whatever, coins, credit card as a reward for rendering a service onto them. When you go out into society, like you go to the shops, and they’re essentially saying, “Well, what have you contributed to society that I should give you this clothing or I should give you this service?” You give the money as proof that you are a contributor to society. So when you think about money this way, all of a sudden earning more of it doesn’t become a problem.
So that’s the money issue, but then there’s also the profitability issue. So a lot of people believe that if I make this amount of profit, that it’s somehow unethical. And we’ve heard the horror stories, like say in America with that CEO that jacked up the price of the AIDS medications. So that’s obviously unethical, where he controlled the whole market and he just made it unaffordable for people. So, that’s a huge problem.
But when it comes to local services and small businesses, what you need to consider is what are the competitors charging? What’s a fair price to pay? What is the market willing to pay? And whatever your profit margins are, you earn that. If you find a more efficient way of doing things and your therefore increase your profit margin, that’s completely acceptable as long as the other party is happy to pay that higher amount. So, that’s the margin.
But even more important than this is the core philosophy that whenever you sell something, you must provide far more value than what you have charged. So you may be wondering, that’s a contradiction, right? You’re giving all this value, but how are you supposed to make profit from it? Yeah. So here’s an example; so let’s just say I charge $5,000 for a service, like my coaching, and my client gets $50,000 as a result of increased sales. So who is the bigger winner in this situation? Arguably it’s them because I help them to achieve so much value as a result of that investment that they made with me. So if every business is doing this, man, can you imagine how great our society will be?
Rosie Chong:
Oh, we’ll be thriving.
Ben Lai:
That’s exactly why Australia is such a great place to live because we have this perpetual cycle of value giving. The more that this happens, the better it is for everybody. Talking about ethics, one of the greatest ways to lift poverty is by having a thriving economy. It’s not about dumping money and then buying food for them. You buy food for people, they eat it, it’s gone. You have a thriving economy, you lift up the poverty line. You’re solving a lot of world’s problems by being successful in business. So it’s in your interests, Rosie and all the listeners, to be as profitable as you can be.
Rosie Chong:
So it’s basically just understanding. I think it’s about changing that mindset and the relationship you have with money and the way you perceive. I think that’s a big light bulb moment. But then also understanding, sure, you can make a profit and it is okay to make a profit and make money and have profit margins. But you also still need to give back and have that value exchange. I think that’s so important.
Ben Lai:
Yeah, and the more you focus on that value, the more convincing you’re going to be and the better it is for everybody.
How do you know how much to charge?
Rosie Chong:
How do people know that they are charging the right amount? How do they know that what they’re giving is going to be giving enough value? In the example you gave of charging $5,000 and giving back 50,000, that puts you in not the best position, purely in a numeric sense. So how do people even begin? Where do they start to know, okay, this is what I’m going to charge? Is it just looking at competitors or can you go beyond that?
Ben Lai:
Yeah, look, there’s a lot of different factors that will come into play, but the most important one is what the market is willing to pay. So it’s easy. You see this on eBay and other auction sites or Facebook marketplace. They’ll put some item there and they’ll put some ridiculous price on it, like $1,000 for a little toy or whatever it is. That’s the price, but that’s not its value.
The value is purely determined by what the market is willing to pay for it. One of the major ways that they will determine how much something is worth is by comparing it with competitors. So if you have competitors, then you need to contend with those price points. You can go slightly above or even a lot above, but the greater the distance is, the more the justification needs to be. So let’s just say, for example, Rolex watches. You can spend up to $40,000 on a Rolex watch
Rosie Chong:
Oh, easily.
Ben Lai:
Yeah, and there’s not even the highest point. Or you could buy a hundred dollars, just a fashion watch. And so what’s the difference between the 40,000 and the hundred dollars? That’s their job to communicate that, the prestige-
Rosie Chong:
Advertising.
Ben Lai:
The advertising and all that sort of stuff. How much you can charge is pretty much determined by the market, but the greater the distance, the stronger the justification needs to be.
Rosie Chong:
Interesting. I love that. I mean it makes sense. At the end of the day, sure, you can price well above your competitors, double, triple, but you need to be able to convey what that value. At the end of the day, you need to know what are your audience willing to pay for your service or for that service in general, whatever industry or service you are in, which is awesome.
Ben Lai:
Yeah, that’s right. I mean, we’re living in a time where it’s so easy to compare. You just go on Google and then look up the next competitor and ask them for a quote. That’s great from a competitive point of view, because then clients are forcing these businesses to really have a good hard look at their profit margins and their service offering, making sure that they’re delivering absolute value to their clients.
How do you prevent losing customers when raising prices?
Rosie Chong:
Oh yeah. I think when you’re starting to look at maybe increasing your price or pricing above competitors, some people might start thinking, well, will I start losing clients, how do I still maintain paying customers? What can you do to prevent losing clients or customers if you do want to increase your price or maybe into the market at a higher price?
Ben Lai:
Yes, yes, that’s a really good question. It’s extremely tricky when it comes to existing clients because of this psychological factor called the anchoring effect. What it basically means is whatever number you’re presented with first, you’re kind of locked into, and it’s very hard to deviate from that. This applies to all sorts of different situations. But for the existing clients, a really good communication strategy needs to be put in place. You have to come across in such a way that you’re communicating, reiterating your value. I can’t emphasize this enough, don’t be apologetic for the price.
Rosie Chong:
The company.
Ben Lai:
In the mail, we get these notices from our internet company, electricity provider, “We’re so sorry that we have to increase our prices.”
Rosie Chong:
We’re not sorry.
Ben Lai:
Well, at least they have the appearance of it. But look, don’t be apologetic and really focus in on the value that you’re providing your clients. I would say that the safe zone is around 5%. Everyone understands the inflation and 5% is roughly what inflation is, so no one’s going to say anything. You’re not going to lose any clients with a 5% increase. Once you get to 10%, 20%, 30% or more, that’s where you’re getting into the risk zone where they may look at the different competitors and choose someone else. That’s where having a real strong communication strategy would be important. That’s for existing clients.
For new clients, that’s a different story because they are not yet anchored on anything unless they’ve spoken to your competitors. If they’ve spoken to your competitors, that’s their anchor, and you have to work around that. From that position point of view, what you need to do is to position yourself. So whether you are the low, medium, or high end provider, you need to communicate how you are positioned in the market compared with those others that are cheaper or more expensive than you, and explain the differences between them.
Mind you, if you’re the most expensive, you need to justify why you’re the most expensive. If you’re the cheapest, you also need to justify why you’re the cheapest and why it’s not a risk to do business with you. So if you’re going to go on either end, you might as well go on the higher end because it still requires some degree of salesmanship to sell anyway. But yeah, you’ll have an easier time if your price is lower. There’s also a disadvantage though that the cheaper clients tend to be the ones who demand the most and complain the most. So just be mindful of that interplay. So positioning is extremely important.
Rosie Chong:
I think you’ve explained it so well for people that have existing clients. I mean, I think of myself when I’m looking at my electricity bill and my wifi and just think, oh, they’re increasing. I feel anchored to this idea. But then it seems like that challenge or that obstacle is not quite there with a new client. But you still have to prove yourself or be able to communicate, as you said, in both scenarios, just in different sort of key messages of why should I be charging this? Or why am I increasing? Or why am I a hundred dollars more than my competitor, a thousand dollars more? So it’s really interesting and really understanding the psychology behind it as well.
Ben Lai:
Absolutely. There’s this equation that I’ve devised. I tend to think of everything mathematically, being Asian. It’s best to think of it like this; happiness equals perception divided by expectation.
Rosie Chong:
I like that.
Ben Lai:
Yeah, it’s so simple.
Rosie Chong:
Into an equation.
Ben Lai:
Yeah, I know. Almost everything can be broken down into equations. But it’s really interesting because when you raise the expectation or lower the expectation, that has the greatest effect on how happy a person feels. Let’s think about it in a relationship example. So when you’re in a relationship, if your partner does something nice for you on a consistent basis, you begin to expect it, right? Your expectation rises. When they stop doing that, then you are disappointed you’re not happy anymore.
So it’s a very, very interesting interplay about how this works. But the reason that perception’s at the top is because it’s not reality. Perception is reality for people. So you have to be extremely mindful of how people are perceiving your business and your service, manage the expectations, and that’s how you can create the greatest happiness for your clients.
Rosie Chong:
You need to trademark that equation.
Ben Lai:
I wish I could.
What should entrepreneurs focus on before increasing prices?
Rosie Chong:
I love it. I love it so much. I think what’s interesting about that is there’s obviously this big part of it is perception from a customer or client’s perspective, which we can’t necessarily change or control because they are who they are. What sort of things do you think entrepreneurs or founders or freelancers can control or have that influence over to really put themselves in the best position, whether it’s to find new clients, maybe it is about price increases or just setting themselves up for that long term financial success?
Ben Lai:
Yeah, absolutely. In fact, perception can be heavily influenced by the business owner. If you think about the branding on your website, if you think about the business cards that you have, the way that you dress, the way that you talk, present yourself, all of those things are affecting perception. So when you are mindful of those things and you pay a premium for your website and you pay a premium for your business cards, those increase the perception of your quality. We have to acknowledge the fact that people will make judgments on you based on really superficial things.
Rosie Chong:
We’re human.
Ben Lai:
That’s reality, right? So being mindful of those things that influence our perception of a business, if you take attention to detail to those things, it can certainly raise your profile and it raises the ability to charge more. So here’s a question; why can the big accounting firms charge ridiculous prices for their services? It’s because of the perception that people have. It’s a big company, they’re trustworthy, they’ve got the branding down, they’ve got the marketing down, et cetera, et cetera. So that’s how they can command such high prices for arguably equivalent services to other companies.
What else determines how much you can charge?
Rosie Chong:
Yeah, interesting. It’s all marketing at the end of the day, is how you show up and how you present yourself. Do you think that that is the only determining factor in what someone can charge, or there are other factors that go into what your final price point is? We’ve obviously spoken about looking at competitors and understanding what value people are willing to pay, but is there anything else that can influence what a person can charge?
Ben Lai:
Those are the most important factors, but it is important to consider margins as well. If you’re selling a product, for example, you’d want to aim for a certain percentage revenue on top of what your cost of goods are. You’d also want to consider your goals, your overheads, and if you want to expand, how many staff will you need? How much will you need to pay them? So a lot of different factors comes into play, but we’ve covered the core ones.
Like I said, if you gauge what the market is and how much your competitors are charging, then that’s usually the strongest indicator. There’s an interesting book out there called the Blue Ocean Strategy, which basically says to define yourself in such a way that you’re so different that you can’t compare. It’s apples to oranges. That way, you can almost charge whatever you want because they’re not the same. Yeah, so it’s a really good concept to just create your own niche, create your own ocean, and you don’t have to compare on prices from that perspective.
Rosie Chong:
I love that. So basically just don’t worry about everyone else, do whatever you want, easy as that. There’s obviously a lot of factors that go into it, which is really cool.
Ben Lai:
Absolutely, and that’s really where my clients come to me. If they have a massive gap that they need to increase their prices, or if they need help with these intricate considerations, it certainly helps to talk to someone about it to create a structure that works for your organization.
How do you help your clients navigate their price increase?
Rosie Chong:
Oh, definitely. What do you do then that’s different? How do you really help your clients navigate their prices, increase their prices, and really make sure that they’re not necessarily losing all of their clients, but they’re still not hemorrhaging money?
Ben Lai:
Oh, dear. I would really hope that they don’t lose even one client, let alone all of them. Although, I can’t make those sort of promises. There are so many factors that come into play. But generally, my process is very thorough, and I make a promise to my prospective clients that I need to at least be 80% sure that we’re going to get you a positive result before I even put a proposal in front of you. There have been so many people that I said that just on initial assessment, “I don’t think that I can help you,” and then I’ll point them in a different direction. You need to focus on lead generational, or you need to focus on this X, Y, Z.
So yeah, there’s a lot of factors that needs to be taken into consideration before I engage. But once we do, it’s a very, very thorough process. We look at the goals, we look at the competitive landscape. We look at the structures, their goals, their expenses, the psychology, and helping to articulate their value, et cetera, et cetera.
What we do is we essentially first deal with all of the mindset issues; so mindset around money, business and selling. Then we put the pricing structure into place so that you understand very clearly what you’re charging and how to charge it. Then it’s the sales strategy because once you actually engage with people, they’re going to ask you questions like, “Why are you so expensive?” You have to have an answer for that, right?
Rosie Chong:
Oh, totally.
Ben Lai:
If you don’t have something prepared, then they’re going to be thinking, oh gee, this guy’s not sure about himself. I’m not going to pay that price. I’m going to go with the cheaper provider.
Rosie Chong:
Of course.
Ben Lai:
So you have to take all of these different phases into consideration. If you’re missing on any one of those, the whole thing collapses. They all depend on each other, sort of like a triangle, to hold up.
What can entrepreneurs do about cheaper competitors?
Rosie Chong:
No, I love that. I think it’s really good that you have such a thorough process. And you’re so transparent as well with anyone that you potentially help. I think that’s a really credible, trustworthy thing, some of the buzz words we’ve gone through, so great. Something you’ve touched upon is this challenge that some customers, whether new or existing, is this idea of, well, if company A is going to increase their prices, why wouldn’t I just switch to a cheaper provider? What can people do about people or competitors or other companies that might be offering the cheaper service?
Ben Lai:
Yeah, absolutely. This is where differentiation is really important, and there are many, many different ways to differentiate a service. Even when you’re selling commodities, there are ways to differentiate. I used to sell the most boring commodity on the planet, which is domain names. We were selling our domain names for $140, and the cheapest competitor was $25. So I had to figure out a way how to actually charge that much for my company and still deliver value to my clients.
So what I actually did was I said to my clients that when you buy a domain name with us, you’re not just buying a domain name, you’re getting me with the package as well. So I’ll give them my direct phone number, and anytime you want to talk about website stuff or strategy and advice, I’m happy to provide that. If you think about that, how much does a web developer charge for their time? Roughly $250 per hour, so they’re getting massive value for their domain name purchase with us.
That was my way of doing it. But for yourself and for anyone else, think about all the different ways that you can increase the perceived value of what you do. That could be having a really close relationship with your clients. I’ve heard of some businesses literally being in bed, marrying the daughter of the CEO. So that sort of bond, they’re always going to be doing business together. But of course, not everybody can do that.
Just find ways to increase that perceived value. That could be just better communication, just regular communication; “Here’s the report for what we’ve done for you this month. Here are the results that we’ve achieved. Here’s the return on investment for you.” If you are better at communicating, that is valuable to the clients, even if you’re selling a commodity.
Rosie Chong:
I love that. So basically, it’s just all about how can you differentiate and offer something different, offer something better. Or even that perception of value that you can be doing to then elevate, maybe not elevate, but help yourself stand out compared to providers.
Ben Lai:
Yeah, absolutely. Here’s a really sad truth, is that the business usually goes to the better communicators, not necessarily the better products. There are lots of really great marketing people out there, but when you sample the product, it’s not very good. There’s a lot of those so don’t let all of the business go to those people. For those of you who are providing a genuinely good product or service, get good at communicating that so that you can get your fair share of the business. And preventing your clients from doing business with those liars and the cheaters who are just good at, got the gift of the gab.
Rosie Chong:
They’re just good with words.
Ben Lai:
Yeah, it’s a sad reality, but we have to face up with that. That’s the competition.
Rosie Chong:
It’s honestly just the way it is I guess.
Ben Lai:
It is.
What should you do if you want to help others struggling with finances?
Rosie Chong:
A big part about it. Then lastly, what about people that might want to help clients that are really struggling with finances? How do you go about being able to have the right price or really be able to help them out? If they’re already struggling with their money, how can you make sure that you are not making it worse off where you’re actually helping them out?
Ben Lai:
That’s a great question, and there’s two ways to look at it. The first one is that you can either find really efficient ways of doing things, or you can consider them as charitable cases. But the thing is your ability to provide charitable work is going to be limited by how profitable your business is. So say for example, myself and other business owners I know, we make a commitment to donate 10% of our time or our profit to charitable causes. Now, if you’re not making enough to survive, then you’re going to be looking at that 10% and thinking, oh, do I really want to give that? Maybe I should just hold onto it.
But if you are prospering and you’re making hundreds of thousands of dollars, and then you come across one of these cases, and then you say, “Well, this is our normal price, but because we do set aside a portion of our funds for special cases, I’m willing to offer this to you,” and you can feel good about it instead of being reluctant or struggling. So yeah, just to reiterate, either find really efficient ways of doing things so that you can lower your prices for everybody, or you just be profitable enough that you can then give that without having to struggle.
Rosie Chong:
I love that. That’s a really smart way to approach it in those two different ways. Because I think a lot of people would see a client that is maybe struggling financially and can’t pay for your services and think, no, I’m going to run the other way. But it turns out there are solutions, which is great.
Ben Lai:
Absolutely. Yeah. There are options for them if they’re willing to explore that and if they have the right mindsets.
Rosie Chong:
Amazing.