Nowadays, with the soaring inflation, it might seem like everyone is raising their prices. And given the prevailing economic atmosphere, a price increase might not sound like such a bad idea. After all, your business needs those profit margins to thrive and grow.
Pricing is a delicate balancing act between profitability and customer satisfaction. More so when repricing. It’s a weighty decision requiring thoughtful considerations and a careful approach so as not to scare customers away. Ask yourself whether raising your prices puts your business in a better financial or bargaining position. Although in some cases, selling at a higher price might easily be the best financial decision you can make for your business.
Let’s dive deeper into the question of raising prices. When is the best time to raise prices, and how do you approach it?
Know when to raise prices
Timing is critical when adjusting prices. A big part of any pricing strategy is knowing when to ask customers to pay more without pushing them away and taking full advantage of such opportunities. Here are three situations that can justify a price increase:
You have enough pricing power
Pricing power is defined by the price elasticity of demand. In other words, it’s the ability to change an offering’s price without affecting its demand or sales. It’s every entrepreneur’s dream to wield this power because, without it, demand and sales naturally plummet as prices go up. The idea is that you can tap into this power to raise prices without worrying about customer churn.
However, pricing power is not something you can gain overnight; it heavily depends on your business model, target market, and industry. For instance, traders in luxury, scarce, commodity, or brand loyal goods have immense pricing flexibility since they hold a lot of leverage over their markets. Below are the four main factors of high pricing power:
- High barrier to entry in your niche or industry
- High industry concentration
- Stable market share
- Limited industry capacity
Sales are up, but profits are down
Dwindling or stagnated profits despite growing sales volumes can only mean one thing: your cost of production has gone up. So, check for changes in your cost of goods or services. Are suppliers charging more for raw materials, or is it taking more work and time to produce the same product or service? If this change is not a temporary thing caused by one-off expenses, such as purchasing assets or moving to a new facility, it might warrant a price increase to restore the bottom line. But try bringing the cost of production down without compromising quality before deciding to bump up the prices.
This is what happens with inflation — the higher prices inevitably trickles down the supply chain to the end product. It's up to you to evaluate the mark-up that keeps your margins in the green.
Your competitors are charging more for less
It’s always a good idea to keep a close eye on the competition. If you notice that your competitors are managing to earn more by selling less, it might be time to push for a higher price tag yourself. They might be selling an inferior product or in lower quantities at a higher price than you do.
But this only works if customers can tell or even care about the quality or quantity differences between the competing brands. That’s where competitive pricing becomes tricky. So, tread carefully here so as not to end up on a high-price island alone.
How to raise prices without scaring customers away
Warren Buffett once said, “You can determine the strength of a business over time by the amount of agony they go through in raising prices.” Buffett firmly believes that pricing power is the mark of a great business.
But even with great pricing power, you can’t just raise your prices inconsiderately. You still have a brand image and reputation to uphold, loyal customers to retain, and competitors to fend off. With that in mind, here are three price adjustment best practices you should consider:
Keep your customers in the loop
It’s important to notify customers of an upcoming price increase, especially in B2B markets. Otherwise, an abrupt price adjustment might come as a major inconvenience or shock to some. Also, explaining the reasons behind the price increase while reaffirming the value and ROI of your products or services is a considerate way to communicate a price increase to customers. Keep the message simple and express confidence in the price change. And accept that some customers may not be comfortable with the new price, but do not apologize for it.
Try shrinkflation
Shrinkflation refers to reducing a product's quantity while still selling it at its original price. This is a clever workaround to raising prices that you’ll often see in the food and beverage industry. It's also a great way to supplement a price increase by catering to customers who might not afford the new price. For instance, you can raise the price of one product but then introduce a new scaled-down version of the same product and sell it at a lower price. Shrinkflation is a relatively safe approach from the pricing psychology playbook.
Align your price increase with the overarching pricing strategy
How well does your pricing strategy accommodate price adjustments? This hinges on whether your prices are based on value perception, competition pressure, marketing efforts, or psychological factors. Knowing this will give you something to work with when raising prices.
With value-based pricing, for example, you can restructure your offering to change the customers’ perception of its worth, allowing you to increase the price without raising any eyebrows. Price bundling is one common way of doing this, where you bundle select goods or services and sell them as a package unit at a revised price.
Maybe you don't have to raise prices after all
When asked what the biggest driver of future profit growth in their businesses was, 63 percent of respondents in a survey said "sales," and 22% cited “cost reductions,” while only 12% answered “price.” The survey also shows that while many businesses are keen on increasing prices, only a small fraction of planned price raises are ever successful, even with low increment targets.
What this tells you is that you should consider other revenue growth options before deciding to raise prices because a price increase is quite the gamble. You could instead try cutting your operational costs, increasing your sales volume, expanding your business , or adding a new revenue stream to improve the bottom line.
And remember, running low on cash may not be a valid reason to raise your prices. Taking business financing would be a more fitting solution to cash flow problems than planning a price increase that might not work as intended. If it's cash you need to boost the cash flow, grow the business, or get out of a financial jam, Lendzero has your back.
Lendzero is an online platform dedicated to helping entrepreneurs access fair funding deals. It matches small and medium-sized businesses with prequalified, pre-negotiated financing offers from a host of verified lenders. Sign up with Lendzero for free and discover business financing made easy. And please feel free to call us at (888) 850-1021 if you have any questions or concerns.
