One of the best ways to get more cash coming into your business is to increase your prices. It’s a way to directly expand your profit margins, providing more cash flow to reinvest in growth opportunities, improve your operations, or fund other important business needs.
While price adjustments are often seen as a necessary step to account for rising operational costs or inflation, they can also be a good way to unlock greater value from your products or services. For small business owners, mastering the art of price increases is not only about keeping pace with economic shifts, but also about strategically positioning your brand for long-term success. This requires balancing the need for profitability with customer satisfaction, so that your price hikes don’t drive away loyal customers. When done thoughtfully, price increases can be a key driver of sustained growth and market competitiveness.
Pricing strategy
Ideally, you’d conduct market research to tell you what the competition is charging and what your customers are willing to pay. You can then amend your pricing strategy to charge as much as you can, without impacting on demand. Regardless if you price below, the same or above the competition, there should always be room to increase your price.
When your prices are high enough to cover costs, give you a reasonable return, and are attractive to customers, you know you’re winning.
Before you increase your prices
There are some key factors to be aware of before you hike up the price sticker. Most important is not alienating your customers by increasing your prices too dramatically. Keep the following in mind:
- Convince customers you’re worth the extra money. This is where you emphasize your unique selling point – great customer service, free delivery, superior product – so that your customers agree you’re worth paying more for. You’ll also reduce the risk of them going to the competition if you can convince them a price hike is justified.
- Provide a great customer experience. This means making sure that all your staff are well-trained, knowledgeable and friendly. Dealing quickly and efficiently with customer complaints is essential. People will pay more if the customer experience is second-to-none. Think of the times you’ve paid more rather than go with a budget service, because you know you’ll be treated well.
- Make sure there’s sufficient demand to justify a price increase. Consider your market position and what the competition’s charging.
- Communicate with your customers. Tell them why you’re increasing your prices, as it shows you’re thinking about them and what they expect.
When you’re increasing your prices, try to stagger them over time, instead of raising them all at once, and consider limiting your increase to products that are expensive to source or manufacture. This means you’ll have the necessary cash to manufacture the product, and the price communicates the higher quality to the customer.
Deciding on the price increase
Let’s say you sell coffee tables for $200 each. The cost to manufacture them is $50. That means your gross margin is $150 each time you sell a table. If your overhead is $5,000 per month, you’ll need to sell 33 tables to break even.
You’re confident that you can sell more than that. Demand is high, you’ve got an excellent marketing strategy that’s paying off, and you’re more than keeping up with competition. So, let’s say you raise the price of each table to $250 each, giving you a $200 gross margin.
Two scenarios from the extra $50 in price are:
- The number of tables to break even is now only 25, i.e.$5,000 overhead divided by your new $200 gross margin.
- If you can sell the 33 tables originally needed to break even, you’re now making a profit of $1,600 rather than $0, i.e. 33 units multiplied by the $200 gross margin is $6,600, minus your overhead of $5,000.
Imagine what impact it would have on your profit margins if you could sell more than 33 per month. The cost to your customers is relatively small, your own costs haven’t risen, and your gross profit margin is widening all the time.
This means you’ll have more cash on hand to reinvest in your business. If your coffee tables are selling well, you might want to use the money to buy new equipment, expand your facilities or hire more staff.
Crunch your numbers and see how just a small price increase can improve your profits.
Next steps
- Begin by conducting a thorough market analysis to understand your competitors’ pricing, your customers’ willingness to pay, and any gaps in your current strategy.
- Before implementing a price hike, make sure to inform your customers transparently about the reasons for the change and how it benefits them.
- Reaffirm the value your business provides, whether through excellent customer service, superior quality, or unique offerings, to help justify the increase in price.
- Instead of a significant price jump, consider staggering the increases over time and targeting specific products with higher costs to manage customer expectations and demand.
Raising your prices can be a powerful lever for increasing profits and driving growth in your business. By ensuring that your price adjustments are well thought out and communicated effectively, you can maintain customer loyalty while boosting your margins. Remember, the key to a successful price increase lies in balancing profitability with customer satisfaction. When done strategically, price hikes can position your business for long-term success without losing sales.