For the past few months, many businesses have had to raise their prices to reflect the increasing cost of goods and services in the market.
But raising prices is not always a straightforward decision for the simple fact that customers abhor higher prices.
And this makes it an uphill battle for small business owners as they struggle to maintain their profit margins and retain customers.
To make this decision a little easier, we share some reasons you should raise prices, how you should go about effecting a price hike and when you should do it.
Before we proceed, we would like to address a common fear many businesses have struggled with when they think of raising prices.
To be honest, any price increase no matter how insignificant or how well deserved or timed is bound to cause a loss of customers. But the good news is that the number of customers you would lose due to a price increase is a minority and would make a little dent in your revenue. These customers you’ve lost are usually more focused on the price of your offering than the value you’re giving in the first place.
Now, that you are aware of this reality, let’s proceed to some reasons you should raise your prices.
Why Businesses Increase Prices
1. Cost Inflation – One of the reasons small businesses raise their prices is because of an increase in their costs of production or as a result of government policy. These factors are external and the business owner does not influence them. Hence, to sustain their profits and stay in business, it is necessary to increase your prices.
2. Excess Demand – Another reason is due to an increase in demand for their products. The more demand a product or service commands, the more likely it’s that business owners would affect an increase in prices to reflect the demand.
3. Added Value – Sometimes, businesses raise their prices when offering customers has increased value. Say you sell accounting software, when you add features to the software, you would want customers to pay more to access those features.
Regardless of the reason that necessitates a price increase, its implementation can affect its acceptance by customers. There are a few tips that are important to note when increasing prices.
4 Important Tips for Raising Prices
1. Timing Matters – The timing of a price increase can influence how well the increase is accepted. Business owners should always be time conscious so as not to put in place a price increase at a bad time. Raising prices when the business would face the least resistance like when they enjoy an increase in demand for their products or services is recommended.
2. Communicate – The way price increase is communicated to the customers is critical to the success or failure of the price hike. Business owners always communicate with customers ahead of time about upcoming price changes. It helps if they mention the reasons that may have necessitated the increase in price as it makes it easier for them to accept.
3. Test Customers Reaction – It is always good to gauge how well your existing customers would respond to the news of a price increase. To test their sensitivity, you can affect your new prices with new customers to see whether they accept it, their acceptance would give you the confidence you need to affect the increase on your existing customers. You can also increase your prices in small portions instead of at once it would help them adjust to the price hike with ease.
4. Proper Planning – Many business owners don’t put in place a price increase until it is too late. When higher prices are suddenly imposed on customers, they get scared and look elsewhere for whatever you’re offering. Planning price changes would provide the structure and strategy needed to decrease the risk of customers fleeing when you raise prices.
When is The Right Time to Raise Prices?
Businesses should review their prices every 6 -9 months. Such reviews would help them adjust their prices so they can keep up with inflation. When there is a good enough reason, then a business may raise its prices.
If you’re like most entrepreneurs, you are not shy to put in the work to achieve your business goals, but your hard work does not always bring the result you want. So, you work even harder sacrificing freedom and personal time…still no results.
It is time you met the SME coach. The SME coach helps business owners learn the secret of financial freedom – How to build a profitable business that runs itself and works without the owner.
You don’t have to be at your business every day to make your business work. You don’t have to lock the core knowledge and expertise on how to manage and direct the business in your head, worried that the business will stall when you don’t show up for work.