What prevents you from raising your prices?

Many businesses would want to raise prices, but the risk of upsetting customers and losing business prevents them to do that.

There are many cases where your business might actually suffer from such price increases due to customers leaving.

This is especially bad if you have fixed costs for serving your customers and you now have costly overcapacity that can really hurt your business.

So you need to make sure that does not happen in order to safely increase your prices.

Raising prices requires leverage

You want to be in a situation, where it doesn't hurt your business at all if your customer leaves because of increased prices.

This can be achieved by being oversubscribed. The idea is that you have more demand than you have capacity. This translates into higher pricing power because you can raise prices and still have demand to fill your capacity because of your “extra” demand.

In theory, you can keep raising your prices until the demand level meets your capacity level, but in practice, you want to keep your business slightly oversubscribed. This will help you to maintain your pricing power.

Why this is so hard for businesses?

Most of the businesses fail to gain any pricing power because they don’t even aim to be oversubscribed. The typical way of optimizing your business is to scale your capacity hand in hand with your supply.

It’s an easy trap to fall into. You want to build a valuable business and scaling your capacity and demand at the same phase sounds like the most efficient way to do it.

Why would you try to get more demand than you can service? Wouldn’t it just go to waste?

If you see your demand being higher than your capacity, you naturally start hiring and scaling your capacity until you are no longer in a situation, where you have demand that you can’t meet. And once again, you’ve lost your pricing power since losing customers now means that you have costly overcapacity.

This is the fatal flaw that makes sure that keep charging the average price.

How to get oversubscribed

Some might think that in order to be oversubscribed you shouldn’t scale your business but it’s not true. It just means that you need to scale your demand faster than you scale your capacity.

In the book Oversubscribed, there are a few practical tips on how to create a situation where you are oversubscribed.

The first tip is around how you do your marketing. Many companies are doing sequential marketing, where you do a bit of marketing all the time as you have capacity. This is not a great technique if you aim to be oversubscribed. Instead of doing ongoing marketing, you should focus on campaigns.

With campaigns, you generate high demand that comes all at the same time. This has a high chance of resulting in more demand than you have capacity.

Another tip to help you get oversubscribed is to use social signaling and scarcity. Making it public that you have a lot of potential customers and only a little capacity is a great way to boost your sales. It can also increase the perceived value and that way improve your pricing power.

Using that scarcity in practice is something Crave Cookie founder Sam Eaton was talking about in the Indie Hackers podcast.

They have a very limited amount of delivery slots, which makes people want their cookies even more. So just the fact that you are oversubscribed and people know it can help you to stay oversubscribed 🤔

I write about growth and startups. If you find this useful, follow at → https://jalopinion.substack.com/p/what-prevents-companies-from-raising