According to recent reports, such as this one from the National Federation of Independent Businesses (NFIB), many small businesses have finally begun to consider a price hike. It was to be expected as the increased cost of commodities, confirmed inflationary pressures, and year-over-year of sluggish consumer spending have whittled away profit margins at a time when economic and legislative uncertainty reigns supreme.
But choosing to raise prices versus maintaining them is a delicate balance. Here are five things to consider before altering the cost of your products or services:
1. How long have you been in business? To maximize your price increase you should aware that timing plays a significant role. Ideally, if you have been in business for a few years and have built up a loyal customer base, a modest price increase on key products or services will not drive away too many customers. Increasing prices may be a bit difficult, however, if your business is relatively new.
2. Have you considered legitimate cost-cutting? Before raising your prices, have you looked into ways to decrease your expenses and free up cash flow, by for example, improving your inventory management or debt collection processes?
3. How will the price increase affect your brand? The price associated with a product or service is a key contributor in conveying the perception of value and status. Usually, this idea is brought up when talking about price discounting, but it also applies to price increases. Make sure that your price increase is in line with the product or service’s overall value.
4. Can you raise prices on a group of products and services in a trial run? To test out the possible customer response to a price increase you may want to increase the cost of only a small group of items or services. You could also try offering a different cost structure to different groups of customers such as loyal, repeat customers versus new ones, or those physically closer to your business versus those further away. A little experimentation could give you a lot of valuable feedback.
5. Are you promoting the value or status of the product/service? It is a good idea to accompany a price increase with a marketing campaign that emphasizes the product or service’s value, uniqueness, or status. People will often be more willing to spend on those things that either give them a lot of bang for their buck or, as in the case of luxury items, on those things that serve as a status symbol.