Price increase = profit increase
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.
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. When your prices are high enough to cover costs, give you a reasonable return, and are attractive to customers, you know you’re winning.
What to consider before you hike up the price
Making sure a price increase is successful is largely due to convincing your customers it’s worth it. Most of the time people are happy to pay more if you can justify it. So, make sure you:
- Emphasize your unique selling point and competitive advantage. This helps 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, empowered, 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 during the transaction and for the years to come.
- Make sure there’s sufficient demand to justify a price increase. Consider your market position and what the competition’s charging.
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.
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. While it is important to be looking at pricing increases, it is just as important to ensure that you are always reviewing your variable costs to ensure you have a strong control over expenses.
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. Now you only have to sell 25 tables to break even, and if you sell the same 33, your profits go from $0 to $3250. Not a bad profit increase is it?
Imagine what impact it would have on your profit margins if you were able to 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.