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.

The High Cost of Employee Turnover

One of the tasks of small business ownership that most owners dislike is searching for, interviewing and hiring employees. As our businesses grow, it's inevitable that we'll need help getting all the work done. We need employees, or our businesses hit a plateau or capacity that we can't grow beyond. But the hiring process is one that we don't have a lot of experience in, it takes away from our perception of all the other “important” work we need to do, and frankly we're just not that good at it. As a consequence we tend to hire the first seemingly qualified candidate that is pleasant enough to get along with.

You may have heard the old adage, “Hire slow, fire fast.” Unfortunately, most business owners hire fast and fire slow. In other words we don't use enough care in selecting employees and we often end up with performance that is less than anticipated or needed. But in the time it takes to confirm under performance (think 2-4 months) we develop a relationship with the person in the sense that we like them, or understand them, or sympathize with them. That relationship then makes it hard for us to let them go so we put up with a lower level of performance thinking that things will get better or we'll eventually train them to do the work to the standards needed. So we fire slow, but eventually terminate their employment and start another recruiting search all over again.

A lot has been written about the high cost of employee turnover, but it is not obvious because it is money not directly taken out of the business nor is it often an identifiable, single expense. But make no mistake, turnover is costly. Numerous sources state that turnover is at a minimum in the range of 30-50% of employee salary. So if you have a $50,000/year employee, losing and replacing that person will likely cost you AT LEAST $15,000-$25,000! What causes that high cost?

• Cost of the person who fills in for the vacant position.
• Cost of lost productivity to the business.
• Administrative cost of stopping payroll and benefits.
• Cost of reshuffling work or of delaying shipments or service.
• Cost of the training invested in the lost employee and the training for a replacement, including licenses or certifications.
• Severance costs or continuation of benefits.
• Cost of remaining employees' reduced productivity due to “water-cooler” talk about the former employee.
• Cost of lost knowledge, skills or contacts that the person leaving takes with them.
• Cost of unemployment insurance.
• Cost of lost customers that the employee takes with them or influences.
• Cost of advertising to find a replacement or cost of recruitment agency.
• Cost of vetting and interviewing replacements.
• Cost of drug screens, background checks or reference checks.
• Cost of pre-employment tests or assessments.
• Cost of onboarding, i.e. business cards, keys, telephone, email, etc.

If you are honest with yourself, turnover is likely much higher than the 30-50% typically quoted. Doesn't it make sense to put a little more upfront effort into the hiring process to improve your odds of retaining employees for a long time? The time spent interviewing, checking references, doing assessments, training and more also are costly, but you will actually reduce the time and money spent on these if you do them less frequently. Working on employee retention is financially rewarding!

Discipline

How disciplined are you? This is a tough question, isn't it? I think most of us would admit that we could be more disciplined, particularly when it comes to our businesses. We typically WANT more activity and results, but we find we don't have the TIME to make those wants a reality. So when we think about our shortcomings on this topic of discipline, we usually think of it in terms of time management.

The reason it is hard to be disciplined in our use of time is often due to the tons of distractions we face. From a business standpoint, the biggest distraction of all is our personal life! Yeah, if we didn't have to eat and bathe and sleep and spend time with family and friends and recreation and church and....well, we'd have a lot more time for our business, wouldn't we? But since our business is supposed to support our life, the “distraction” of our personal life is one of those things we just can't get rid of.

Managing the distractions (personal or business) comes down to priorities and choices. We choose the things that we do, although many of our activities are guided less by conscious thought than they are by the habits we have. Still, our ability to stay on task or be distracted is our choice. And our choices should be guided by our priorities. But are they? Is it a priority to spend two hours per day on social media, or on sales followup? Is it more important for you to discuss politics with a supplier or review your financial outlook? Are you more productive making a run to the post office, or discussing performance and expectations with an employee?

For many small business owners, we often choose the distraction rather than the priority, sometimes because it's easier, sometimes more fun, and sometimes without thinking at all, just reacting to what is in front of us. So in order to improve our use of time and achieve more of the results we want from our business, we first of all have to raise our consciousness about our priorities and our choices. One way to do that is to start each day with a simple list of the most imporant thing(s) we want to do that day... and then actually DO those things. If you want to improve your discipline, improve your focus on priorities. By definition, priorities should be the most important things in your business and life. Keeping them in front of you, at the top of your mind, will improve your ability to make the choices that create the business and life you want.