During the course of running a business you are going to have to raise your prices. Price increases are unavoidable if you want to stay in business. You have to constantly monitor your price point and your costs so that you are both competitive in the market and profitable.
Raising Prices to Keep up with Inflation
The most common reason for raising prices is inflation. When it costs more to get your product to the consumer you have to charge more to cover the costs and make a profit.
In good economic times you can expect a general inflation rate of 2%, sometimes it’s higher sometimes it’s lower. Your increase in costs may even be higher depending on your industry or the many variables associated with your business.
As a business owner you need to know your costs, and your margins, at all times you in order to determine if your product is at the right price point.
Allowing your margins to slowly erode will kill your bottom line. You’re devaluing your product/service by holding your price and accepting a smaller margin. One of your most important jobs, as a business owner, is to protect your margins by demonstrating value to clients and customers and come to market profitably.
In order to consistently, and incrementally, raise your prices you need to have already done the work. That is to say, you need to be positioned in your market competing on more than price alone. You need to already have done the marketing work and differentiated yourself and have a product/service that provides a lot of value.
If you haven’t done the work, you are going to have challenges every time you need to raise your price and protect your margins.
You should fear a shrinking margin more than losing a customer. There’s plenty of customers and opportunities in the world. Ever heard the saying – there’s plenty of fish in the sea? You can always go fishing. Unfortunately, shrinking margins is cutting off the life blood of your business; you can’t go fishing with out a rod or reel. Most small businesses will not do enough volume business to make up for a shrinking profit margin.
Incremental price increases are far easier to implement than larger ones.
Did You Enter the Market too Low?
Many business owners enter the market under pricing their product/service believing that they will have a higher sales volume if the consumer is convinced that they are the least expensive alternative. Outside of commodity items, there really is no correlation between lowest price and the most sales.
We had a few thoughts about why some business owners start by under pricing. Listen now!
Small business owners need to understand that price helps position them in the market. Winning the race to the bottom, unfortunately, demonstrates to the consumer that your product is cheap. People want the best value, not necessarily the cheapest price.
Entering a market dramatically under priced is almost the worst mistake for a small business. When a business enters the market dramatically under priced, they need to completely re-position their business in the market in order to get to the price point they require. New businesses usually have limited resources and may not be able starting from scratch again.
For example: I’ve been selling product X for a year at $5.00. I’ve realized that I should be selling it for $15.00 in order to cover my true costs, make a profit, scale my business and stay competitive to my competition. I can’t just raise the price without alienating my current customers.
I’ve attracted the wrong customers. They won’t follow me up to a 3X increase in price. I’ll be in a position where I’ll have to “justify” my price. Justifying my price as cost increases, or the wrong price point to begin with, are not great sales messages. My competitors will be demonstrating value and trying to make connections with my customers while I’m basically apologizing. I’ll need to redefine and re-brand my product/service.
Setting the proper price for your products from the beginning always makes it easier to run a successful business. You need to properly position your product/service and create demand for it and not just be the cheapest.
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