If so, the latest advice from the experts will come as a welcome suprise and a boon to your bottom line.

Nearly a year ago, Dave Reich was facing a dilemma. As general manager of Theta Digital, a high-end home theater equipment manufacturer in southern California, he had watched the 18-year-old company's sales decline for a number of years and now the new products the company was working on were taking longer to bring to market than expected. Worried about the business's direction and the fate of its 15 employees, last spring Reich began looking for new ways to improve Theta's bottom line. After turning to Atenga, a market research consulting firm, he was a bit surprised when they recommended a strategy that, in the face of sliding sales and thinning profits, seemed downright counter-intuitive—raise prices.

"In the past, the company had succumbed to old, bad habits when it came to pricing," Reich acknowledges," believing the conventional wisdom that if you raise prices, you sell less." Indeed, Theta's pricing policy for most of its 18 years had followed this " conventional wisdom," which meant setting prices on new products simply by affixing a multiplication factor to their cost and then adjusting them only sporadically.

Over the long term, though, this pricing strategy, or lack thereof, had become the primary reason for the company's dimming fortunes. Market surveys showed that despite Theta's sterling reputation, its products, which range in price from $3,500 for a small amplifier up to $20,000 for a surround sound-system processor, were starting to be perceived as of lesser quality precisely because their prices had remained stagnant for so long. As a result, the market research firm recommended Theta hike its prices by as much as 20% to 30% for its various products. Calling it an eye-opening experience, Reich now expects his new awareness of pricing to significantly change the future of the company.

"In our experience, any number of our clients admit they picked their prices almost out of thin air," says Per Sjofors, founder and managing partner of Atenga, Inc., the Woodland Hills, California-based consulting firm that worked with Theta Digital. Faced with trying to decipher price elasticity charts, market trends, and demand curves, Sjofors says he understands why many smaller companies like Theta essentially give in and adopt a simplified " cost-plus" pricing method." But that's unfortunate," he explains," because, this way, most companies don't ever learn the real difference that pricing can make."

Just how much of a difference? At the beginning of their book, The Price Advantage, authors Michael Marn, Eric Roegner, and Craig Zawada answer this important question." Pricing is far and away the most powerful profit lever that a company can influence," they explain." The right price will boost profits faster than increasing volume; the wrong price will sink profits just as quickly." As evidence, the authors cite an extensive 2002 business survey that found a 1% increase in pricing returned, on average, 11% more in profits, a far better return on investment than similarly-sized improvements in sales volume, fixed or variable costs (see graph, right).

Price Increases Yield the Biggest Bang for your Profit Buck ...


... Yet Few Businesses Actually Employ Them

Yet despite price's importance in driving profits, companies of all sizes—and small businesses in particular—continue to follow the same hidebound " conventional wisdom" that had trapped Theta Digital in a cycle of low sales and lower returns. In fact, a survey from earlier this year showed that a mere one in ten chief executives from small businesses recognized optimizing pricing as their best opportunity to improve profitability." That's why I started my company," explains Sjofors." After two decades in industry, I felt frustrated with the way that most companies were overlooking pricing.

Understand this: Customers want to give you money
" A lot of small businesses get pricing backwards," explains price consultant Reed Holden." They start with their costs and never end up looking at what people are willing to pay." This concept of " willingness to pay," represents a fundamental change in thinking about how customers choose what to buy, one that shifts from an adversarial, price-focused approach to a more cooperative, value-based one. And though it might appear touchy-feely, this new strategy is borne out by research on purchasing decisions.

" In fact, the percentage of customers that buy strictly based on price is no more than 15% to 35% in any market," says Holden. So, by competing just on price alone, Holden explains that businesses are adopting a kind of victim mentality, mistakenly catering to the most fickle and least profitable end of the market." Most of a business's customers are relationship or value-based, but by focusing mainly on price, you run the risk of converting them to price-based customers," he says." And those are the ones that are the first to move when your prices go up."

Rafi Mohammed, a former economics fellow at the University of Virginia's Darden School of Business and author of The Art of Pricing, agrees, adding that this willingness to pay from the customer must be met by a willingness to charge by your business. In other words, don't be afraid to get creative about finding different ways to let customers give you money.

" The most interesting of these ways is what I call 'pick-a-plan' pricing," explains Mohammed." Some customers may be really interested in your products, but don't want to buy. So why not let them rent or lease or pay in installments or sign up for a monthly subscription?" He cites Apple's decision to sell individual songs, rather than entire albums, through its iTunes service, and Costco's model of capping its sales mark-up at 14%, while charging an annual membership fee, as two successful examples of changing up pricing models." I always tell firms, 'Don't be gun shy, you're entitled to take a profit for the value you've created,'" Mohammed says." Customers should be thanking you."

How Do I Know If "The Price Is Right?"
A telltale sign that your company's pricing structure is undervaluing your products or services involves the law of diminishing returns, or what marketing expert Thom Winninger calls the spiral effect." I get companies coming to me all the time saying, 'We're selling more and more stuff, so why are our margins getting thinner every year?'" says Winninger." My answer is very simple: I tell them, 'it's because you're competing on price alone.' "

Winninger, author of Price Wars, notes that many companies, blinded by gaudy sales volume, blithely coast along for years thinking that their customers are motivated by something other than just price, that is, until the day a big box retailer comes to town and customers start disappearing. Instead, Winninger emphasizes the need to avoid price traps like quoting rates over the phone, copycat advertising, and the overuse of discounts. Instead, he stresses more subtle strategies like combining products to make price shopping more difficult and focusing sales and pricing efforts on your most profitable items." A small business may be selling everything," Winninger explains," but [the owner] may never have asked if they're selling the right thing."

"The Beautiful Thing About a Sandwich"
Among the favored tactics for avoiding a cutthroat price battle are bundling—essentially combining your products or services together into larger packages—and segmentation—adding or subtracting features on your products to target different tiers within a market.

"That's the beautiful thing about a sandwich, it bundles stuff together," explains price guru Winninger." You may lose some money on the meat, but you still get your high margins on the lettuce and the bread." Clustering products or services, he says, builds a stronger bond with your customer and ensures that you're including your most profitable products in the sale." If your competitor is giving away paint brushes, you want to sell a can of paint first and then give away a paint brush. If you're a lawyer, you don't quote prices on wills, you offer a broader package of 'estate planning,' " he says." I always say, selling one item is just a transaction, but once you sell somebody three things, you've built a relationship."

Pat Begley, a vice president at RWD Technologies in Baltimore, Maryland, recently learned the importance of the second tactic, segmentation. When she was asked to oversee the rollout of RWD's new uBenchmark software this past fall, she, too, turned to an outside marketing and price consultant for help." I was afraid of going to market and underpricing it," Begley says. After getting back the market research, she realized that with some minor modifications to the product and its price, RWD could tap into three distinct markets rather than just one." I would have rolled out one price for everything," she explains," but now we're looking to have three versions at three different prices, which should noticeably increase our sales."

Sticking to Your Guns
Perhaps the most difficult step in changing your prices, however, comes in dealing with your customers' reactions to them, particularly if you end up raising prices significantly." If you're selling on the consumer market, people won't necessarily know you've raised prices," says Atenga's Sjofors." But if you're in a b-to-b environment, you probably have dedicated purchasers buying from you all the time, and that's where you can get a lot of pushback." And how your business reacts to this pushback is just as important as finding the best value-based price for your products of services.

The key to weathering a brewing revolt over your new, higher prices starts with emphasizing the right reasons behind the increase, explains Sjofors." You could bring up rising costs, but that's not the best way to go about it," he says." Instead, you want to justify the new prices by talking about all the things that will positively affect your customers, like the new, more efficient version of your product or your faster, more accurate delivery system." And because your company's salespeople are most often the ones explaining the new prices, he says it's imperative that they receive training on how to defuse customers' objections." After all, what good does it do to work hard on fixing your prices only to have your salespeople go out and give discounts because they can't effectively sell your products' or services' value?"

Certainly Theta Digital's Reich now sees the important connection between price and value. Indeed, he thinks that the company's new, higher prices, which Theta began rolling out in 2008, are a better representation of his products' true value and will not only lead to higher profits but a rebound in sales as well. But even if sales remain steady, Reich says the experience has convinced him of the importance of correctly pricing his products." I'm now a big believer of establishing a selling price based on the market and customer value first, and then making everything work back from that."