A McKinsey & Co. study found that raising prices 1% with no change in demand could mean an increase in profits of 11%. Inflation for 2018 is running at about 2.3%, so this generally means you can expect to pay more for the goods and services your business uses. With a tight labor market, you’re likely to increase wages for the coming year at an even greater rate. These conditions mean one thing: it’s probably time to raise your prices.
Concerns about raising prices
Naturally, you fear that raising prices will reduce demand. You need to 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, cigarettes, Apple iPhones).
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. As you look ahead to 2019, what cost increases do you face, and how much? Obviously, to maintain your profit margin you need to have your prices keep pace with increases in your expenses. Also consider new or added costs (e.g., offering free shipping instead of charging for it).
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 cut-rate.
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. You may prefer to raise prices less often than more often to retain your customers. As such, be sure to raise your prices sufficiently to avoid having to raise them again in the near future. But another strategy suggests making gradual increases on a regular basis. For example, Starbucks makes small increases just about annually.
Notice. Do you want to give customers a heads up about coming price increases? Do you prefer to silently raise prices?
“That which costs little is less valued.” Cervantes’s Don Quixote.