Is It Time To Raise Prices?
 By B.J. Addington

One of the most difficult and dangerous decisions to make in business is whether to raise prices. It’s difficult because so many factors are involved. It’s dangerous because you can price yourself out of business.

The first rule to consider is that buyers – not you – set the best price. This is the reality of supply and demand. You may tinker with prices, but you can’t sell if buyers won’t buy. Your challenge is to maximize profit – the difference between your costs and your sale price – without chasing off buyers.

For this reason, increasing costs for raw materials, labor and overhead like taxes, doesn’t automatically translate into higher prices. Don’t expect customers to value your previously priced $10 widget at $12 simply because it now cost you $2 more to produce.

When raising prices to offset your costs, it’s always advisable to educate buyers about the reason. Buyers experience their own increased costs of living too. So you can negate some of the price increase sticker shock by reminding them that you’re not gouging, you’re merely covering your costs. Naked, unexplained price increases can serve only to irritate, or worse, to chase away customers.

One often overlooked factor is indirect costs. Small businesses sometimes establish prices by calculating their costs of production, advertising, marketing, operating expenses, taxes and other obvious expenses, then adding a profit margin. But indirect costs, such as utilities, licenses and insurance that don’t bear directly on production and sales, can eat up profit margins if you ignore them. Be sure to track increases of all appropriate costs, not merely those immediately involved in creating, promoting and selling your products or services.

Another vital factor when considering price increases is that you must remain competitive. If everyone selling widgets increased prices from $10 to $12, you may not suffer much by going along with the crowd. However, if competitors continue to sell for $8 while you’ve been selling for $10, you’ll be harder pressed to justify an increase. Customers who previously thought your widgets were worth the $2 difference, might think otherwise if the spread becomes $4.

On the other hand, you may deserve a raise. Even if your costs haven’t increased and even if you are already priced higher than competitors, you may still be able to raise prices and increase profits. Unfortunately, the only way to know for sure is to do it and see the results.

Economists explain that for every increase in price there inevitably is a decline in the number of buyers. However, if the higher price’s profits are more than enough to cover the decline in volume of sales because of fewer buyers, your price increase will still be successful. Selling fewer items at a higher price and greater profit margin can be more profitable.

This tactic works best if you haven’t positioned your goods or services as bargains. The reason is that your customers have already been willing to pay a little more because they feel they get something better than your competitors sell. They won’t be as fickle as buyers who are motivated by low prices.

Before increasing prices, test the waters. Try increasing prices for a portion of your market or a segment of your product line and then measure the results. If the higher prices result in greater profits, you can be more confident about increasing prices across the board.

Conversely, if you cater to bargain shoppers, you can expect much greater loss in the volume of sales with every price increase. Bargain shoppers can always find a lower price, and when given a reason to, they will.

Another way to counter buyers’ adversity to increased prices is to simultaneously increase the value of what you sell. Most buyers are willing to pay more to get more. If your previously wired widgets are upgraded to battery powered, you may be able to increase the price painlessly because buyers perceive a greater value than with the old models.

Finally, to raise prices, capitalize on loyalty. Many buyers develop a comfort zone with sellers. Appeal to that long-standing relationship when informing buyers that you must increase your price. If they’ve been happy with the relationship, they’re more likely to tolerate price increases when advised about them in such a way.

How do you know if it’s time to increase prices? If costs have squeezed your profit margin too small for comfort (or for profit), it’s time. If competitors have widely increased their prices, it’s probably time. If you can raise prices and still increase profit, it’s definitely time.


(Posted February 2006)

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