I wrote last week on my early days just after taking over a corporate limousine service business and how I needed to make some drastic changes in the business in order to make my investment pan out.
As I wrote I had borrowed 100% of the money needed to purchase the business and even doubled the sum so I could acquire a couple of new limousines to be added to the fleet. With the lingering obligation of a heavy burdened loan, it was vitally important for me to turn the investment successful.
To add to the challenge, I had to do so all while not being able to actually take care of any of the daily operations of the business myself, but with the help of a brand newly hired manager, who like me knew nothing about running a limousine service business, knew none of the clients or the drivers, nor the daily operations.
I also mentioned last week, how I radically changed the rates that we offered in the business. The previous manager that had been running the business for several years leading up to my take over, had specifically told me, that we could not increase our rates AT ALL, because it was certain we would lose all the clients.
Well, as explained previously, changes were drastically needed and the previous operational manager would have to go, and I now had my new guy from outside the industry to help me.
Again, I changed the rates at which we offered our limousine services radically.
Instead of my original proposal to increase rates across the board by a mere 10%, I increased all the rates, by much more than than, some even by some 60%.
Best of all I got away with it.
In hindsight, I learned so many lessons from what I did with the rates here, and how I managed to actually have the clients embrace it. I will give you some of these here, but I’m afraid if you want all of the cool lessons I learned from it, you will have to actually get one of my paid programs (“Pricing For Profit”).
But I will not leave you empty-handed here and will give you some of the valuable lessons that perhaps you can make use of in the business you have:
The first couple of realizations I had were as follows:
We were the largest limousine service business of its kind in Denmark and naturally held the leadership position in the industry. That also meant that, everyone else were looking to us on the issue of pricing, and as it seen all too often, smaller competitors often incorrectly believe they need to be priced at lower rates than the leading brand.
When the previous operational manager told me that we would lose all the clients, I believe his fears were that we were already the most expensive limousine service option in the country, and by increasing the prices we would increase the gap to all the other operators’ rates even more and lose the clients.
While this is a risk, I believed and trusted this wouldn’t be the case.
I also believed that seeing that all competitors looked to us for setting the rates, they would soon follow our lead and increase theirs too, thereby lessening the gap. If we did not increase our rates, our competition would never increase their rates, and we would all just continue to suffer the consequences of having to meet growing expenses without making adjustments to meet such.
And soon enough the competitors actually did follow suit with making some price adjustments of their own.
I cannot honestly recollect how quickly the competition corrected their rates, but I believe it came relatively quickly after our changes were implemented. We increased rates for some services by up to 60%, and I believe our smallest increase was about 20%. I believe the highest increases we would see from our competition was that of 10%, I also believe, they were too scared of increasing rates much more than that.
We were still the highest rates operator and had several services offered at up to 60% higher rates than those offered by the best of our competitors. But I wasn’t too worried about that.
The fact of the matter was, that the rates offered in the industry in our country (Denmark) at the time were just way too low, and not reflecting anything resembling the fact that you have a business to run.
Limousine services are notoriously owned and run by private individuals (actually as in case of Denmark, required by legislation), but in truth, as nice and intelligent as many of these owner/operators are, most of them are not business people. Yes, they are great at their trade and provide great service, but they are not often looking at their business truly as a business and running it how a business should be run.
Many of the owners would often drive many of the trips themselves, and as often is the case, kinda forget that they should still calculate in a full expense for a chauffeur for that situation and that the business should still be affording the full salary of the CEO of the business (typically being themselves).
In other words, they much too often far underprice their services.
This is something I have seen with a great majority of my clients when I consult or coach businesses. They just do not fully understand how to price right and how to allocate for all the expenses that a business actually have, such as for instance, how to you price so you allocate for overheads?
At the end of the day, I believe that our competitors were actually really happy to see the price increases we implemented take place and for them to realize they could charge a bit more and still be left offering rates much more competitive than mine.
The realization that my competitors would always offer rates at a lower level than mine actually provided me with some confidence that we could increase our rates and be alright and not lose all our clients. It gave me the confidence that if I increased our rates, at least they would increase their rates somewhat and lessen the gap.
But another thing that I also gave me some confidence that I could make some of the higher adjustments were the fact that most of our end clients – the ones actually traveling in our limousines – were from the US.
When I compared our rates for airport transfers and hotel transfers and the like to those of the US market, I found that we in Denmark were charging considerably less. Seeing that many of our expenses are considerably higher in Denmark, with several higher taxes levied on our vehicles, and also our minimum wages set a higher levels, and all of our social security expenses being higher, it just seemed evident that we in the industry in Denmark completely underpriced our services.
In other words, there was justification to be found in some of our bold moves, and once we took that discussion with several of our most important (our largest) clients they completely acknowledged our changes and went along with it. For many of the clients they just adjusted the rates they sold our services onwards at, and for those who were end users/clients, they understood our need to make changes.
Another way I made some of the more drastic changes take place so I could have my needed rather large price adjustment, yet have the rates accepted more readily, was to split some of the services into differently priced services.
An airport transfer would typically be from Copenhagen airport to a hotel in downtown Copenhagen or vice versa. They would up till our prices changes be offered at the same rate. However, an airport pick-up often entails more time to perform the service.
When you order a limousine service, you expect the vehicle to be there upon your arrival. You do not want it to be late. However, if the plane is delayed or if the traveler has checked luggage (as most would have), the wait for the luggage can be quite substantial, and soon you have expended far more time on the airport transfer from the airport to the hotel compared to the transfer from the hotel to the airport.
My new rates would charge more for the pickups at the airport compared to those at the hotel. With cruise ship pick-ups, you often could have many of the same time challenges, and so I made similar considerations for those services.
Overall, the rate increases were a considerable part of improving the net results of my business. The results after my first year as owner of the business were that the EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) increased by a staggering 32 fold.
Naturally, all the improvements in the net result were not just due to price adjustments, but certainly, the price adjustments were an important part of it.
I have helped many companies that were similarly underpricing their products or services, some of them even to the point that they were losing money on every product/service sold. Of course, the business owners were not really aware of this problem beforehand, but it is easy to understand that if you are not pricing somewhat right, then you can work endlessly and still never come out on top.
Again, my adjustments with our rates were much more nuanced than what I have relayed here, and of course there is much more to the story on how I could successfully implement the very large price increases, but as mentioned, I have only provided you with some of the insights here. If you wish to learn more about how else I made all of this happen, and how you may be able to do something similar in your business, feel free to schedule a free strategy session: https://calendly.com/theautomatedmillionaire/free-business-strategy-session
