The other evening we went to a local restaurant and were shocked when we saw that the prices of all meals had been jacked up. It was disappointing because this restaurant for a number of years has been known for its reasonably good food and reasonable prices.
It’s unlikely that we’ll be going back to that local restaurant mainly because of affordability. Yes, it might be possible to go there for special occasions such as birthdays but now it’s not even worthwhile even patronising this restaurant in a blue moon.
When you are on the receiving end of higher prices, it comes as a terrible shock. Each price increase you accept removes money from your bank account. It makes you poorer. In these economic times, income isn’t rising as fast as price increases from both the public and private sectors.
Fortunately there is competition. We’ve found another local restaurant that serves equally good food for far less. So on the occasional night eating out we prefer to take our business to this restaurant. Besides, the service is better. Competition is really the only market force that can have sent restraining effect on prices.
From the perspective of the restaurant owner who increased his prices, you get a different picture. The restaurant owner needed some way to recoup the costs of upgrading his premises including the toilets, kitchen and the main dining area. He’ll get more customers for sure with the improvements but he has to find money to pay for his capital outlay. Then you need to look at all the inflationary and administered costs that have been rising. Electricity, water and rates and taxes have risen to compensate for inefficiencies and lack of productivity. Landlords are in a strong position and think nothing about chiselling another 10% or more a year from tenants’ escalation clauses. With the prevailing price increases, staff are also demanding higher wages and salaries.
But on the operational side, higher prices make sense for the small business owner. With higher prices, each restaurant table now yields much more revenue for the business. Plus it chases away those patrons who come in for a basic pizza and take up valuable table space sipping on the wine that they have brought themselves to save money. These are unprofitable customers that merely take up valuable table space.
The advantage of higher prices for the small business owner is that you repel unprofitable customers, call out higher paying customers who don’t blink an eyelid at higher prices, set yourself apart from the competition, project exclusivity as a “classy” establishment and leave no money on the table. A pricing strategy is therefore much more than a cost recouping exercise but a way that you can use to position your small business for greater profitability.
If you are just starting out, thinking about building a business from scratch, pricing is just one of the issues that you need to be smart about if you are going to fall into the 10% of businesses that survive in their first year. Pricing strategy and other critical business issues are revealed in my forthcoming book “Breakthrough Ideas”. Why not put your name down at no obligation to get on the waiting list. If the pricing turns out to be too high in your estimation, you have every right to turn down my offer.
