According to one survey, 48% of small businesses plan to raise their prices within the next 6 months. Are you in this group? Should you be? The following is an update from a blog that was posted here a number of years ago and reflects changes in the economy, inflation, tariffs, taxes, and other factors that are impacting small businesses today.
Why raise prices
Raising prices are a way to maintain profit margins when expenses—wages, energy costs, etc.—are increasing. The survey referenced earlier found that businesses are primarily raising prices for preservation. That survey also suggests that the majority of small businesses are planning price increases of 2.1% to 5%, although there are some planning price increases of as much as 12% or more.
Concerns about raising prices
Naturally, you fear that raising prices will reduce demand. Will you lose customers when you charge more? Determine the impact of elasticity on your pricing. This term means the “measure of responsiveness of demand and supply of a good or service to an increase or decrease in its price.” Some goods and services have more elasticity. For example, the use of professional services may decline when prices are increased. Conversely, some goods and services are inelastic, with demand continuing despite price increases (e.g., gasoline at the pump, utility costs).
Where do your goods or services fall on the elasticity scale? This is something you should determine so you know how much flexibility you have in raising prices.
Ways to raise prices
There’s no set formula or strategy for raising prices. You have to determine what works best for your situation.
Consider the following factors:
- Your budget. What are the increases you’ve been experiencing in expenses? Wages and benefit hikes? Insurance costs? Inventory and shipping costs?
- Competitors. You don’t want to price yourself out of the market by charging more than your competitors for the same goods or services. If you offer more, you can charge more. Also, you need to keep your marketing proposition in mind, meaning whether you promote your business as luxury or high-end or at the other extreme as thrift conscious.
- Customers. There is no law that you have to charge the same price to all customers. You may want to continue current prices for existing customers but charge higher prices for new customers. Or you may want to retain prices for customers doing a certain level of business with you (in effect a discount for them), while hiking prices for other customers.
- Frequency. How often you raise prices depends on what your business offers. Fees for services may not increase as frequently as retail and restaurant charges. As a rule of thumb, annual price increases in modest amounts may be wise. This will help you keep up with inflation.
- You may want to schedule your price increases at a time when customers won’t feel exploited. For example, tax professionals probably want to increase their fees well before tax season (or wait until after it) so that the fee schedule is in place at tax time.
- Notice to customers. Do you want to give customers a heads up about coming price increases? Do you prefer to silently raise prices? Iris Pricing Solutions suggests you should preview price increases, so customers know they’re coming.
Final thought
English stateman Harold Wilson said: “One man’s wage increase is another man’s price increase.”
You need to take rising wages and all other factors into account in your pricing…and do your analysis now. Don’t apologize for your price increases as long as you’re satisfied that they’re justified, and you’ve communicated them to your customers.
For additional reference concerning financial management, this list of blogs may be helpful.
