Have You Tried Raising Your Prices?

One of the most common and widespread fears that small business owners have is the fear of raising prices. Sure, we are all afraid of rising prices for the goods and services we purchase in our business. But I'm talking about the fear of raising our own prices to our customers. When was the last time you implemented a price increase?

The fear we have is that if we raise prices our customers will leave us for the next lower price down the road. Perhaps our fear is also that we haven't developed a strong enough value proposition to keep our customers loyal. And there is some validity to that, because if we fail to offer value beyond just our price point, we are essentially in a commodity business. Few commodity businesses turn out to be very profitable, so that is a dangerous path to tread. Working on that value proposition is critically important, but more on that another time.

Let's focus right now on this fear of losing customers if we raise prices. In my experience, most reasonable price increases have very little, if any, impact on volume. Following price increases, clients commonly report that to their surprise volume hasn't changed, no customers were lost, nor has anyone complained about it. Amazing, right? Where a customer or two has been lost, I'm usually told that it was the kind of customer that wasn't profitable anyway, or one who was sucking the life out of the business in order to properly serve them. So the end result of most price increases is one simple, positive outcome....profits increase!

That's nice, you say, but “my business is different”. Well, let's look at some math to analyze the consequences of a price increase. Let's say you have a small business with sales of $400,000 and a gross margin of 25%. That means your gross profit is $100,000. If you're contemplating a 5% price increase, you know that the impact would be a sales increase of $20,000 (5% of $400,000). All of that increase goes to gross profit, which means that your resulting gross profit is $120,000. Your new gross margin is 28.6% ($120k/$420k). Here's the interesting part. For you to do no worse than you are today (with a $100,000 gross profit), but with that new 28.6% margin, your sales would only need to be $349,650 ($100,000/28.6%). So you would break even if you lost sales of $70,350 ($420,000-$349,650).

That is a 16.8% sales loss ($70350/$420,000). So now step back and ask yourself, am I really going to lose 16.8% of my business if I raise prices 5%? Doubtful.

I'm not advocating pricing yourself out of your market. You also don't have to be the highest price provider. But if you are not getting paid what your product or service is worth, and if you're afraid of what a price increase might mean, please consider the math carefully and overcome your fear.