CONTENTS:
Perhaps one of the most difficult things a business owner struggles with is raising prices. In this article we will provide you with several approaches to raising prices. This should help you to more easily raise your prices.
Why is it so Difficult to Raise Prices?
Perhaps the most difficult thing to do as a small business owner is raising prices. We often feel guilty when raising prices – that we’re not worthy of higher prices. Especially since our customers are often asking for discounts and other concessions. Sometimes we need to remove ourselves from our emotional attachment to our business, and approach pricing on a more objective and detached state of mind.
Add Value to Your Product or Service.
One of the easiest approaches to increasing the price of your product or service is by adding value. By adding value to your product/service without incurring a cost for that added value will allow you to increase your price without increasing your cost. The most common method to adding value is to add a guarantee. It can be as simple as a lifetime guarantee against product defects, or as robust as the guarantee Craftsman offered on their tools – lifetime free replacements.
Add a Risk Reversal Guarantee.
A very powerful tool for increasing prices is to add a risk reversal guarantee. This is where you completely transfer the risk associated with a purchase from the customer and transfer to yourself. An example would be a weight loss program where if the customer doesn’t pay until after thy loose their first 10 pounds. In the customer’s mind there is no risk to them and they have nothing to loose. Since you’re so confident in your weight loss program that you’re willing to assume the risk, the customer is willing to pay a higher price.
Should I Raise Prices in Small Increments, or all at Once?
Most business prefer to raise prices in small increments. This lessons the impact on the customer and isn’t as noticeable. However, if there’s a significant event such as very high inflation it is easier to justify a larger price increase. But all in all, it’s better to make small incremental price increases so you can measure their impact over time.
Using a Sale as an Opportunity to Raise Prices.
Use a sale price, or coupon applied at the time you raise prices will lessen the impact to your customers while allowing you to transition to higher prices. An example is to increase your prices by 12%, then offering your customers a 10% off coupon. Then over time gradually reduce the amount and frequency of the coupon. You could reduce the coupon to 5% off and offer the coupon less frequently. Eventually you want to no longer offer coupons. At this point you’ll be at the new higher price target. The key to this approach is to use the coupons and sales as a temporary bridge and to be sure to get to a point where you no longer offer coupons or have sales.
How to Raise Prices Without Losing Customers.
You can’t! Quite simply, unless you’re only raising prices by a few cents you’re going to lose some customers. Some people say you need to increase the value of the product or service – but some customers won’t be purchasing based on that value. It’s best that you don’t try and not lose any customers when raising prices. Perhaps these bargain hunting customers will be replaced by higher value customers who are looking for what you offer – and appreciate the value you provide.
It Doesn’t Hurt to Lose Some Customers.
Let’s look at the numbers and see how a price increase may result in losing some customers yet increase your total profit. We’ve put together a table below to show a couple of examples how a price increase along with less customers actually increases your overall profit.
For our example we make a couple of assumptions. First, we assume a net profit for the business of 20% (after all expenses are paid). We also assume the cost of the product as the product cost and all other expenses in the business spread across the products. We also assume a 10% drop in customers (purchases) for every 10% we raise prices. While we’re using this number, depending on your circumstances it may be more or less. Lastly, to keep it simple we don’t account for spreading overhead and other fixed costs over the reduced number of items sold.
First you can see that a 10% increase in price increases the profit per item by 50%. Then assuming a 10% loss of customers the total profit still increases. Actually, it increases by a whopping 35%. Amazing!
Next we show what happens if you increase your price by 20%. This increases your net profit per item by 100%. If you happen to lose 20% of your customers, you still increase your total profit by 60%. Super amazing? I think so.
| Price | Cost | Net Profit | Units Sold | Total Profit | Increase in Profit | |
| Original Price | $100 | $80 | $20 | 100 | $2,000 | |
| 10% Increase | $110 | $80 | $30 | 90 | $2,700 | 35% |
| 20% Increase | $120 | $80 | $40 | 80 | $3,200 | 60% |
Get Rid of the Bargain Hunters.
Customers who purchase from you because of low price are the most difficult customers. They expect you to sell your product or service to them at a loss, then expect white glove service from you. If all they care about is price and have no appreciation for the quality or other intrinsic value, you should send them on their way. The most valuable customer to you is the one who knows what they’re purchasing and are willing to pay a fair price for it.
Raise Your Prices – Then go on Vacation.
Too often, as business owners we raise our prices then reverse that increase shortly afterwards. If you struggle with raising prices an approach you might want to try is to go on vacation right after raising prices. This way you’re not sitting at your desk day-by-day watching to see what happens to your sales. Give it some time to percolate and settle in.
Don’t Discount After a Price Increase.
I know, earlier I said that discounting may be a method to ease into a price increase. What I’m talking about here is not to discount your price for a customer who doesn’t like the price increase. Either they don’t value you, or they don’t value your product. They can either accept the higher price, or they can shop elsewhere. If this customer is that demanding for a discount, you’re better off without them (let that person be included in the number of customers lost in an earlier section).