Your customers are not the problem
Raising prices isn’t just about the numbers
By Jennifer Cox
RerF – stock.adobe.com
When was the last time you raised the prices in your business? For many shop owners, it has been more than a minute. And when they do raise them, they bump them up a dollar or a small percentage. Unfortunately, that strategy fails you as the business owner. Your business will not survive when you assume that your customers won’t pay more.
If your goal is to earn a reasonable wage as well as a minimum level of profits, you need to know your costs. People assume it takes a lot of hard work to get those numbers. In reality, if you file taxes for your business, you have already done the majority of the work when you compiled your business expenses for last year. With that information, you can figure out your actual labor costs, operating expenses and overhead. Crunch these numbers to come up with the actual cost of producing your work.
The surprising news, unfortunately, is that many owners discover that their prices are not nearly high enough to cover their expenses, fair wages, and overhead. So, then they get stuck. Not because their calculations are off, but because they don’t know what to say when a customer questions the higher price. Nobody really knows how to handle that conversation.
Image courtesy of Barbara Hayward, Absolutely Specialties.
Price set
Let me step back for a minute. Shop owners set their pricing when they launch their business, when they are still figuring out how to run their business. At that stage, you are learning what is involved in creating an order and are often lowballing quotes just to get orders coming in, or setting prices just below another business in the community in order to “win” the job. Sadly, that win puts you in first place, in a race to the bottom. The stitch count pricing model is what most shops start with. It is simple, it feels relevant to each specific job, and most importantly, it produces a number.
Bargaining
If a customer thinks a price can be bargained down, they will try to bargain. That is not them being difficult. That is how buying and selling works. Everyone wants to feel like they’re getting the best possible deal — it’s just human nature. When you offer a discount without being asked, you’re basically telling the customer that your original price wasn’t real.
The way to overcome this uncertainty about your pricing isn’t to pretend you are confident. Embrace the actual confidence that comes from truly knowing what an order costs to produce. You have confidence when you believe it is fair to earn decent money and even a margin of profit for the work you do for your customers. News flash, it is reasonable to expect to be paid fairly for your work. That is how knowing your real costs helps you update your pricing with confidence.
When you set your price based on what an order really requires, including all the actual time it takes to do the order from start to finish, including the setup, managing the order, and the base level of profit you want to make, you end up with something many shop owners don’t have, a precise number based on what that order truly costs to produce.
Consider a 48-piece golf shirt order. When a job is priced using just the stitch count, it comes to $1,500. A quote covering the full costs of the order comes to $3,072. That revised price is not made up. It covers 20 hours of real work. Setup, design changes, approval, hooping, sewing, and finishing — every step of the job, priced fairly and including a planned profit. At that price, the order covers your wage as well as contributes a profit to your business. At that price, you are not running your business on “ifcome,” which is what you get IF there is money left over at the end of the job. When you set prices using a complete pricing model, you are operating your business with income. You no longer need to cross your fingers every month, hoping there will be money in the bank to make the next machine payment.
A shop owner who understands that their price covers 20 hours of actual production time, a planned profit, and how complex the job is will have a different interaction with a customer than someone who tentatively suggests $1,500 as the possible price, or presents that number as a question, or just hopes that whatever they say sticks. One of those conversations begs the customer to argue the price. The other one, not so much. It is presented as a fact, not the opening offer in a negotiation.
Image courtesy of Tamara Boyer, ThreadArt & Everything Promotional
When you are raising prices for an existing customer, you do not need to give customers a full breakdown of all your costs. They will expect a clear, professional explanation when pricing changes. Those are not the same thing. The best way to handle it is straight forward. Something along the lines of “The current price reflects what the order costs now.” Do not say “I have to charge more,” as that makes it sound like you are a victim of costs you do not control. It sounds like you quoted a randomly made-up higher price. This is not a fixed script, so use your own words.
If they ask how you got that price, say it covers the production process, materials, labor, setup, and a fair profit. Do not get defensive; be professional. Some customers will try to argue about a higher price. That will happen, no matter what the increase is.
The real question is, what do you do when it does happen? The biggest mistake I see is giving a discount right away. A customer might say, “That seems high,” and the shop owner drops the price before the customer even finishes their sentence. Even if you don’t mean to, that tells the customer that you didn’t really stand behind your price in the first place. That then makes them wonder why they should believe it either.
You may need to reframe your mindset and your attitude, now that you know what this work costs, and you know that you have priced it fairly. There is no reason to be sorry for that. If you were to become a customer of your customer, would you expect them to produce their work for less than a fair wage and reasonable profits? I do not think you would. Our customers should not expect that from us either.
Image courtesy of Tina Liu, Otto Cap.
Another way to respond is to ask them a question. Something like, “What were you expecting?” or “What is your budget for this order?” Both questions give you useful information. This also gives the customer a chance to explain what they truly need, which can surface a different issue than their initial price concern.
If there’s a real difference between what they can pay and what the job costs, then you can discuss the order specifics, not haggle over the price. You can explore how the job can be changed to stay within their budget. Suggest fewer items, different products, a simplified design, fewer design placements, or a longer deadline. Or, it may be that this specific order just does not work out. That is also a possible outcome, an acceptable outcome. What is not okay is doing the job for less than it costs to produce it, hoping that the relationship will get better later. It won’t. Trust me on that, I’ve learned that lesson the hard way.
Customer retention
Some customers will leave when you raise your prices. I want to be straight with you — it will happen. Shop owners who’ve gone through this, the ones who switched to a complete pricing system and stuck to their prices, usually tell me the same thing. The customers who left were often the ones who took up the most time and brought in the least profit. The customers who stayed were generally easier and more fun to work with. Your market is unique, so I can’t tell you exactly what will happen when you raise your prices. But I can tell you this: the conversation you are dreading is rarely as tough as you imagine.
The customers who are truly right for your business, the ones who care about the work itself, not just the price, will listen to and respect a clear explanation of your pricing. The ones who can’t or won’t accept that are likely the same customers who were forcing your prices down all along. We called them the “bottom feeder” accounts. You simply can’t build a successful business catering to them. They want high-quality embroidered items but want to pay prices better suited for less expensive decoration methods.
I have a challenge for you. For your next five quotes, figure out the price based on the actual work involved. Count the real labor, include wages for you as the owner, and decide on your desired profit margin before you set the price. Next, quote your customer that price without any discounts. See what really happens. Don’t focus on what you think will happen, pay attention to what does happen. Doing this on the next five quotes will teach you a great deal about your customers. Don’t quote jobs based on just stitches. Price the whole order.
If you have not yet taken the NNEP pricing diagnostic, it is available at nnep.com/diagnostic. Five minutes. No fee. You see your pricing score immediately and if there are gaps. If you have already taken the diagnostic, you know where to focus.
Jennifer Cox is the founder and president of the National Network of Embroidery Professionals (NNEP), an organization dedicated to supporting embroidery and apparel decoration business owners with the tools, resources, and community they need to build profitable, sustainable businesses. She can be reached at jennifer@nnep.com.
