It’s usually at this time of the year when business owners sit down and start working on next year’s budget. For most businesses, one of the key budgeting challenges will be how to grow sales and profit.
One of the fastest and easiest ways to grow revenue and profit is to increase the price you sell your products and services for. Yet most small business owners are reluctant to do this as they fear that a price increase will put them at a competitive disadvantage and they will lose customers. In some cases this is true, but for most small businesses raising prices will make sense.
Businesses that operate in competitive, low margin markets where price is the key driver of demand are generally locked into prices set by the bigger players. If you want to win business you have to be cheaper or offer more for the same price. However, outside of these types of markets, price could and should be used as a tool to grow revenue and your bottom line.
Here are seven benefits of raising prices:
1. Raising prices is a far easier and more effective way to grow than trying to win new customers. It is estimated that it costs seven times more to win new business than it does to sell to existing customers.
2. Raising prices has a far bigger impact on the bottom line than selling more. As costs generally do not increase in the same proportion as the price rise, most of the price increase will result in additional profit.
3. Price also makes a statement about the quality of what you are selling. If your price is too low, the buyer thinks there must be something wrong with it and you end up attracting price shoppers who are not the most loyal of customers.
4. Raising prices will force you to compete on other factors than price alone. To justify and sustain the price increase you may need to increase service levels or package into your offering high value but low cost items that take the risk out of purchasing your product or service. For example, offering guarantees, providing friendly return policies, etc. Competing on value is more sustainable and profitable than competing on price alone.
5. The fear that if we increase prices we will lose customers is a common concern. Yes, there may be some clients and customers who are with you right now just because of your price. But generally they are a minority. Perhaps you need to lose some of the clients who expect low prices, in order to make room for clients who are willing and able to pay the prices that reflect your true worth.
6. Although you may lose customers, the price increase generally still results in increased sales and profits. There is a calculation you can do to work out how many customers or volume you can afford to lose before you become worse off.
For example, if you operate with a gross margin of 60% and you increase prices by 10% you will need to lose 9% of your customers or volume before the price rise has a negative impact on your financial performance. It is important to understand these numbers so you can assess the likely impact of any price increase and where your breakeven point is.
7. Raising prices is often essential just to maintain your existing profit levels. Most businesses suffer from “cost creep” where costs are slowly rising due to inflation and wage adjustments amongst other expenses. If you don’t increase prices to keep up with cost increases, you will find profits being slowly eroded.
So before dismissing a price increase or jumping to the conclusion that implementing one will be detrimental to your business, take a moment to stop and consider the upside. Maybe even ask your accountant to model the impact of a small increase for you.
You may find a price increase will provide you with a substantial improvement on your cash position, which you can use to fund those other marketing and lead generation strategies you implement in addition.
Marc Peskett is a director of MPR Group, a Melbourne-based business that specialises in providing, business advisory, tax, grants and funding services and outsourced accounting to small and medium enterprises.
This article first appeared on StartupSmart.