How to Walk the Tightrope When Raising Prices




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Jan 01, 2021

Tightrope.jpgRaising prices can be fraught with risk during good economic times. So, what happens if you try to raise prices during bad economic times? As Hamlet would say, "Ah, there's the rub." If you raise prices, you risk losing clients to competitors. If you do not, decreasing revenue or rising costs can capsize your company. What is a small business supposed to do?

The Art of Pricing

Raising (and, sometimes, even lowering) prices can be a balancing act. As with any major business decision, pricing should consider various factors. Here are several to keep in mind:

Analyze costs. First, you need to carefully analyze the costs needed to bring your products or services to market. Such expenses might include raw materials, storage, personnel, advertising, delivery, rent, equipment, taxes, and insurance. Failure to cover all these costs in your price will inevitably lead to shrinking profits.

Establish profit margin. Next, it is important to establish an acceptable profit margin. This is where the art of pricing begins. To find your company's sweet spot with regards to pricing, consider researching competitors in your region to determine their pricing for comparable products, raising your finger to the wind to discern the business climate and asking your customers about their preferences.

Listen to your customers. Your customers will tell you if you raised prices too high. They will either continue to buy your product or seek out a competitor.

Consider incremental price increases. Small, incremental price increases tend to be more palatable to customers than a few large changes. We see this every day in the rising cost of gasoline, utilities, and taxes. Many customers can handle incremental inflation...just do not shock them with a huge increase all at once.

When considering pricing, it is important to take a long, hard look at both your costs and the quality of your products and services. Customers will generally pay a premium for goods and services that provide greater value. Successful business owners endeavor to increase both the actual quality of their products and the perception of that quality in the minds of customers. Do both well, and a price increase may be in order.

If you are wondering if a price increase in 2021 might be right for your business, please reach out to the accountants at Terry Lockridge & Dunn to review your specific situation. They can be reached at 319-364-2945 in Cedar Rapids, or 319-339-4884 in Iowa City.



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