- June 27, 2012
- Posted by: Business Brokers & Consultants
- Category: Selling a Business
Increasing the price of your products or services is, in most cases, the most difficult decision a business owner has to make. Looking at the negatives is easy.
• Our business is too competitive to increase prices.
• Our customers/clients are used to our pricing.
• Customers are too price-conscious.
• We won’t be able to get new customers/clients.
• We are known for low prices.
• We have a lot of repeat customers, they won’t pay more.
The list of reasons why prices shouldn’t increase could go on and on. The fear is always that people won’t pay the increase and profits will suffer.
Before considering a price increase, one must look at their current pricing method. Do you work on a cost plus a certain mark-up? If you use a mark-up percentage, are all items marked up by the same percentage? Do you try to maintain a price comparable to the competition? If you work on an hourly rate, for example consulting, when was your last increase? Have costs increased and have you increased prices to compensate for them?
Looking at the positives is also easy. Profits will increase; and the price of the business will increase based on the increase in sales and profits. Funds will be generated to do that advertising or promotion you have always wanted to do. With increased profits you can hire that extra salesperson you know will increase business; you can install the technology you know will increase service and lower costs.
As Ravi Mohammed said in his book, The Art of Pricing, “Let me ask you, will a 1% price increase really cause your customers to stop purchasing from you?” A 1% increase on a business doing $5,000,000 a year is $50,000 to the bottom line. On a business with sales of just $500,000, a price increase of only 2% would bring in $10,000 to the bottom line.
One does not need to increase prices across the board. On fast-selling items, increase the price more than on slow-moving items. By doing so, you can test the waters on increasing prices. As Ravi Mohammed also points out, “McDonald’s profit on hamburgers is marginal, but it has substantial profits on French fries and soft-drinks.”
You many decide not to increase your prices, but at least you have taken a look at your pricing policies.