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Raise Prices with Confidence

Jun 17th, 2014

Recently I met with a client to review his quarterly financial statements and to talk about the performance of his business. This small but growing company has been consistently profitable for the roughly three-year period I’ve been working with the owner, but it seemed to be slipping to the low end of the range of profitability in terms of industry averages. We discussed the general ways of improving profits – increasing revenues, cutting cost of goods sold, reducing administrative overhead.

When I asked him about the last time he had increased his prices, he thought for a moment and said “about five years ago.” I asked him how his material costs and operating expenses had changed during that time period. Most had increased, of course, and some of the materials he used had increased quite significantly.

I recommended a fifteen percent across-the-board price increase. I could see deep concern on his face. He was afraid of losing customers. But I assured him that he was in a good position to raise his prices and, after we talked about it for a while, he agreed to a ten percent price hike.

Raising prices is a serious issue, and because of potential negative impact, something not to be taken lightly. There are some effective ways of lessening or even eliminating the impact altogether, though, especially if you’re dealing with a relatively big jump in prices, as my client was.

Here are some strategies to consider if you’re preparing for a big price increase in your business:

  • Be open and explain your reasons – Tell your customers why you’re raising prices, and do so in a straightforward, honest manner. Don’t apologize. Most customers will understand the increase, if your costs have risen significantly, and especially if you’ve tried to absorb cost increases to avoid a price hike.
  • Take advantage of your quality and leadership position – Publicize the awards you’ve won for your quality work and your reputation in the market (as my client has done). Remind your customers that they’re doing business with the best.
  • Increase the value of your offering – Increase the size of your product or offer a “freebie” with each sale. Give your customer more in order to lessen the blow of a price increase.
  • Give customers plenty of warning – Let customers know of your price increase well in advance of the actual hike. Offer them the opportunity to buy now at the lower price and even to “stock up,” if desired.
  • Consider making regular price adjustments – Instead of waiting five years or more and then making a large price increase, consider adjusting prices in smaller increments on a periodic (yearly) basis.
  • Review discount policies – You may be able to avoid problems with your largest customers by granting them attractive volume discounts that are not attainable by smaller accounts. So, as long as they buy in sufficient quantities (cumulative or single-order), a price hike will not sting them as much. To avoid charges of price discrimination, be careful to offer the same quantity discounts to all buyers, even though only some may be able to take advantage of them.