One of the best ways to get more cash coming into your business is to increase prices. It widens your margins and frees up money you might need for business growth.
You should raise prices occasionally, even if it’s just to keep up with inflation.
But growing your profit through effective pricing should be every small business owner’s goal.
Review your pricing strategy
Ideally, you should conduct market research to determine what the competition charges and what your customers are willing to pay.
You can then adjust your pricing strategy to charge as much as possible without impacting demand.
Whether you price below, the same or above your competition, you should always leave room to increase your price if needed.
You want to aim to set your prices high enough to cover costs, give you a reasonable return and remain attractive to customers.
What to consider before you increase prices
There are some factors to consider before you hike any price.
You don’t want to alienate your customers by increasing prices too dramatically.
Keep the following in mind:
Convince customers you’re worth the extra money. Emphasize your unique selling point—great customer service, free delivery, superior product—to convince customers that you’re worth the increased price.
Plus, when you tell them why you’re adjusting your prices, it shows that you’re thinking about them.
Provide great customer experience
Ensure that your staff is 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 spent more because you know you’ll be treated well.
Confirm the demand
Make sure there’s sufficient demand to justify a price increase. Consider your market position and what the competition’s charging.
Stagger price increases
When you increase prices, try to stagger them over time.
And consider limiting them to products that are expensive to source or manufacture. Doing so helps ensure you have enough cash to manufacture the product. Plus, the higher price helps communicate the higher quality to the customer.
Price increase example
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 ($200-$50=$150).
If your overhead is $5,000 per month, you’ll need to sell 33 tables to break even ($5,000/$150=33).
You’re confident that you can sell more than that. Demand is high, your marketing strategy’s paying off and you’re more than keeping up with the competition.
Let’s say you raise the price of each table to $250.
Now you only need to sell 25 tables to break even.
Imagine what impact it would have on your profit margins if you could sell more than 33 per month! Yet, the cost to your customers is relatively small. Your costs haven’t increased. And your gross profit margin continues to widen.
This means you’ll have more cash to reinvest in your business. If your coffee tables sell well, you might want to use the money to buy new equipment, expand your facilities or hire more staff.
See how just a slight price increase can improve your profits?
Conduct market research to find out how the competition is doing, what they’re charging and if you can do better.
Determine if your customers would pay more by talking to them about your product or service. Consider talking to other small business owners to see what tactics have worked for them.