Should I increase my prices?
Should I increase my prices?
Most small businesses have NEVER raised their prices. That’s because they don’t know the facts when it comes to increasing their pricing. They’re scared to death that ANY price increase, no matter how small, will lead to a mass exodus of all their customers, which if bad enough might cause you to go out of business altogether. But is that really true?
In rare cases increasing prices can have a negative effect but for most businesses raising prices is the only way to continue to be profitable.
If you are in a very competitive market with low-profit margins and larger players keeping prices low, it is difficult to raise prices.
However, if you’ve carved out your niche, then raising prices is a great way to grow your revenue and profits.
For most businesses though if you stay stuck to the same ways of thinking and your same strategy on price but somehow expect profits to magically grow – that’s not going to happen.
Fundamentally the most important thing that guides your decisions about price is your profitability. We all would like to make more profit and some of us would like to make significantly more profit. Sadly many small businesses have got so used to making meagre profits that you’ve lost sight of the goals and the objectives that you had when you started out in business, and that’s all impacted by the price that you charge and the profit it generates.
Agreed, an increase in prices might feel uncomfortable to do
For any business owner feeling uncomfortable about raising prices is natural. We are all customers ourselves, and we know how we feel when our garage, our favourite restaurant or one of our suppliers raises their prices.
Why might you need to raise prices:
- Cost inflation – your costs from your suppliers are going up
- Future legislation – new legislation or rules coming into place
- Increased demand – as demand increases there is more opportunity to raise prices
As a minimum, your business should raise prices every year in order to keep pace with inflation. In the real world though it is not always possible, but every business still needs to review your prices against your overheads, cost of sale, and the market you are in.
If business has decreased, a price increase might not be a sensible choice. However, if you’ve been reluctant to increase prices for a few years, then raising your prices is probably well overdue, and necessary to secure your survival.
But increasing your prices doesn’t necessarily spell disaster!
Sometimes, as business owners, we are so consumed by wanting to keep our customers happy that we forget about the bigger picture – and the profitability of our own business.
What we often fail to remember is that it isn’t all customers that are the lifeblood of our business, but it is the right customers that are the lifeblood.
Why? Simplistically there are two basic ways to grow your business.
- Increase customer numbers
- Increase customer lifetime value
Both different, but both have a common denominator: price.
Your pricing creates your positioning, establishing your business for the kind of business you want to be and the type of customer you want to have.
You may not have thought consciously about your pricing strategy before, but you do have a pricing strategy whether you’ve developed it consciously or not. And that pricing strategy will determine your prosperity.
For instance, you could be a low-cost service provider. If you are, then customers don’t expect fantastic customer service as they match their expectations with the lower price they are paying.
Alternatively, being a high-cost service provider looks like a great place to be in theory, but this also means you need to justify your higher prices with the total service you offer.
As business owners the great thing is that you are your own boss; the bad news is that you’re your own boss. The good news is you get to choose how much profit you make by the prices that you set; the bad news is you get to choose how much profit you make by the prices you set’ because a lot of people mess up their pricing strategy.
And little changes to pricing strategy can have big impacts on profitability.
There is no right or wrong between different pricing strategies. Only you know which one matches your business goals.
If you’re wondering whether you should increase your prices, here are a few reasons that may help you decide.
You want to grow your business
The interesting thing about growing a business is that it’s more expensive to get new customers than to raise prices and explain the reasons for doing so to your existing customers.
In fact, research suggests it is at least 6 times more expensive to get a new customer than to keep existing customers and get them to buy again or more from you.
It’s more effective to increase prices than to sell more products
Most of the revenue you get from increasing prices goes to increasing profits, as your costs invariably stay the same.
Increasing your prices allows you to discover the good customers
Having the right customers is what matters most to a business.
If your customers are already buying a lot from you, it can mean you are a healthy business, but it can also suggest that it is time to raise your prices.
As counter-intuitive as this might appear, your customers might be what’s stopping you from growing. If time is taken up by poor quality customers who are often complaining or taking forever to pay then a price increase would separate the moaners from the good customers.
If you raise your prices, the moaners will leave and go elsewhere, leaving only those who recognise your value and are happy to pay you more.
Good customers, if they value the level of service they get from you for the price you charge will probably not complain about a little price increase.
The price you charge also affects the kind of customers that you attract. A higher price will often attract a higher quality of customer. And it doesn’t just attract higher-quality customers it also attracts a higher calibre of staff.
An increase in price helps differentiate you from your competitors and their costs
Take a look at what your competitors are doing. They will provide a benchmark to help you decide on your pricing strategy.
You need to set your prices in comparison with your competitors – either lower, the same or higher.
If your prices are too low, you need to develop a strategy that will allow you to catch up with competitors.
While it’s natural to feel awkward about increasing your prices, you can make this easier by giving valid reasons why you are doing so.
Most customers will totally understand and be supportive of your price increases if you are upfront and honest and show how you are being proactive with your business and your levels of service.
A higher price point will often position you as the quality business. This will then attract more of the right quality of customers — those who can and will afford your product or service.
Because raising prices sets you apart from your competitors, and increases your perceived value.
How to create your differentiated positioning and become the go-to-company.
Higher prices create a better perception of your product/service quality
“You get what you pay for,” how often have we heard that when talking about the quality of something you bought at a cheap price?
If your pricing is too low, the immediate perception is that it will be of poor quality. You will also attract customers who are just concerned with cost and therefore have very little loyalty as they constantly search for the cheapest offer.
The level of profit that you make in your business also affects how you can serve your customers. You can offer a much better service when you are running a profitable business than a less profitable business can afford to do.
There are also dangers with offering low price strategies, in that your competitors may follow you and then you begin a spiral to the bottom.
Raising your prices, however, shows your customers you believe in your product and know it’s worth the money you’re charging. It gives you, and your customers, greater confidence in you and your product or service.
An increase in price brings focus to other value factors
To justify your increased prices you will need to assess and possibly improve other areas in your business.
Some factors you will need to consider:
- Service levels – Poor customer service is often the reason customers change suppliers.
- Include added-value items – Can you offer something extra at little or no cost to your customers, such as free shipping, guarantees, great return policies, and more.
Thinking about the value of your total service package demonstrates that you care as much about your customers’ experience as how much they spend.
Few customers will be annoyed about a price increase
Only some of your customers will be loyal to you only because of your price. Most of them will be with you because of the quality of your product and the service you give.
Increased sales from increasing prices offsets losses from lost customers
You could lose revenue from fewer customers but the likelihood is you will see greater profits from raising your prices.
It is relatively simple to work out how many customers you can afford to lose due to your new pricing structure before your revenue is adversely affected.
Let’s say you sell a widget for £100 and decide to increase that price by 10% to £110. Will that small increase REALLY lead to a loss of customers? Honestly, a few will leave. But even though there will be some customer attrition… to what extent? Let’s look at the numbers.
The business selling this widget is now making an additional £10… ALL of which is pure profit. Right there, that’s a 33% profit increase. For this business to make £1000 in profit selling their widgets at £100 each, they would need to sell 33.3 widgets. But by increasing their price by 10%, they only need to sell 25 widgets.
That means that just to BREAK EVEN, this business would have to LOSE 25% of its customers over a measly 10% price increase… and that simply ISN’T going to happen!
An increase in price is sometimes necessary to maintain profit margins
Price increases are usually a result of an increase in operating costs and a need to maintain current profit margins. You are increasing prices because you must, not because you want more profit.
As these operating costs are out of your control, and cost-cutting can only do so much, you’ll have no choice but to pass on these expenses to your customers in the form of a price increase.
Every business should review their prices at least once a year, to maintain your profitability and your business’ financial health.
Just remember not to be greedy, you should always be able to justify any increase in price. If you can’t justify the increase then the danger is your customers will think you’re just trying to take more of their money and end up not wanting to do any business with you anymore.
Ultimately it is not actually about pricing but about profit.
At the end of the day, we’re all of us in business, and we can’t stay in business on an ongoing basis unless or until we’re making a profit. Because profit leads to prosperity which impacts on the lives of you and your family and all the people that matter to you.
Want some help to work out your best pricing strategy? Book a call here