Deciding When to Raise Your Prices… and by How Much
A price increase is sometimes unavoidable — and now might be one of those times as many businesses are dealing with cost increases, supply chain bottlenecks and labor shortages.
The key to implementing a price hike with minimal loss of customers is timing. It’s hard to be the first one in your industry to raise your prices. If others don’t follow suit, your business could be in the embarrassing position of having to rescind price increases and determining other ways to make ends meet. Here are some key considerations when weighing the pros and cons of increasing your prices.
The first step is to gauge customer loyalty. Some companies have built a base of loyal customers who are willing to pay a premium for their brands. Others have a customer base that’s made up of bargain hunters who would be willing to switch brands to save a few dollars.
How do you know how loyal your customers are? Ideally, you’ve been monitoring their purchasing patterns over the years, and watching how they respond if you or a competitor has a “sales event.” Depending on the nature of your business and your ability to monitor customer behavior, you can also gauge loyalty by how long customers have been patronizing your business. If there’s significant customer turnover and you increase prices, your business could be in a vulnerable position.
Another consideration is the nature of what you sell. If it’s a basic necessity and you dominate your market, your customers might have little choice but to accept a price increase. And even if you sell “luxury” products and services, you might also be in a good position to raise prices to the extent that your customers have an abundance of disposable income and aren’t price sensitive. Of course, that wouldn’t hold true for cost-conscious buyers of nonessential products.
Once you’ve laid the groundwork for assessing the likely impact of a price increase, you can move to the next round of analysis by answering these four questions:
- Which products or services should I raise prices on?
- How much should prices increase?
- When should the price increases take affect?
- Should I notify customers about increases, and, if so, how do I explain the increases?
These questions must be considered in light of how much you’re being squeezed in the current business environment. The more urgent the situation, of course, the less flexibility you have.
In deciding which items to raise prices on, consider the potential cash flow impact. The most immediate effects will come from increasing prices on high-volume products. However, if you’re selling some high-volume, low-priced “loss leader” items to draw in customers who’ll also buy more profitable items and that strategy is working, go easy on raising prices on those bargain items. (See “Responsive Pricing” at right.)
Generally, gradual, selective price increases are less noticeable to customers than an across-the-board price increase. But in some cases, a one-time “tear-off-the-Band-Aid-quickly” price hike, not to be repeated in the short term, can make sense if accompanied by an explanation that customers can accept. Alternatively, you can refresh your product or service offerings and then charge a premium for “new-and-improved” versions that cost you about the same as the old ones.
Now or Later
The current attention on inflation and other unfavorable external market conditions may provide a good cover for your business to increase its prices, especially if others in your industry are raising prices, too. By tying your increases to, say, an increase in the consumer price index, or average gas prices, you can help justify a price increase to your customers — and they’ll likely appreciate your transparency.
Your financial advisors can help evaluate where price increases would be most impactful. They can also recommend alternative or supplemental business moves you can make to keep your business secure in these uncertain times.
Walz Group CPA Presents Accountability in Action with Janel Cross – 401K Planning
In this episode of Accountability in Action, Janel Cross from Align sits down with us to discuss 401K and retirement planning.