Increasing prices without losing sales

One of the best ways to get more cash coming into your business is to increase your prices. It widens your margins and frees up cash you might need for business growth. It’s something that should be done now and again, even if it’s just to keep up with inflation. However, growing your profit through effective pricing should be a goal of all small business owners.

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.
• Ensure 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:

• One. The number of tables to break-even is now only 25 ($5,000 overhead divided by your new $200 gross margin).
• Two. If you can sell the 33 tables originally needed to break-even, you’re now making a profit of $1,600 rather than $0 (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.

See how just a small price increase can improve your profits?

Summary

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 and talk to other small business owners on their success tactics.