Can You Raise Prices Now
The price of gas has increased. The price of paper and wood has increased. Interest rates are creeping up. State and local taxes (often in the form of new or increased fees) are rising. These and other price increases have raised your cost of doing business. Can you pass along the increases to your customers at this time?
Impact of price increases
Whenever you raise prices, expect to lose some sales. Decide what percentage of sales you can afford to lose to help you decide how much you can raise your prices. For example, if you raise prices by 5%, what percentage of sales can you expect to sacrifice and what will this do to your revenues and profit margins. If necessary, work with your accountant to get a handle on these figures so you can determine your price increases intelligently.
Best time to raise prices
Higher prices can potentially be a sales turn-off, discouraging buyers and depressing your revenue figures. But once you determine that a price increase is necessary, recognize when the increase may have the least negative impact.
Increase prices when competitors increase their prices. Monitor what competitors are charging and if they’ve raised prices, you can comfortably raise yours as well.
Increase prices if demand is high. If the market is strong for your product or service, higher prices are justified. As the economy improves, demand may be strong and higher prices can follow.
In the case of products, increase prices when you re-design or enhance them to such a degree that customers can be expected to feel that they would be getting more for the higher price. For example, add something of value (e.g., free delivery) to compensate for the price increase.
In the case of services, increase prices when you are worth more. Added years of expertise usually justify charging higher fees.
Once you decide to raise prices, consider making the increases effective at the start of the year. If you provide business-to-business products or services, typically price increases should be announced at least one week to one month before they become effective (depending on the practices in your industry).
Best ways to raise prices
Once you decide that increasing prices makes sense, do it in a way that will keep customers at least as receptive as they currently are. The idea of a value-added service, such as free delivery or gift wrapping, can soften the blow.
Explain the reason for a price increase where appropriate. For example, a dry-cleaning service that is paying an environmental tax can increase prices to pass the tax on to customers. Communicate with customers in person or by letter – you know your customers and are the best judge of and how they would want to be told about the new price structure.
Consider grandfathering existing customers by continuing to charge them the old rates for a set time. Prepare them to expect a price increase, say in three months.
Losing some customers could be viewed this as a good thing. Often, price increases weed out customers who may demand time and attention without compensating you in sales. Customers who can no longer afford your products or services can be referred to another company that is now in the position you were in a few years ago. For example, if you offer architectural services and have attained stature warranting higher rates, an existing customer who can’t afford your new prices can be referred to an architect who is not quite up to your level of expertise.
Be prepared to lower prices for some good customers. Once you’ve increased price levels, it’s easy to discount them on a selective basis.
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