Raising your prices can feel a lot like walking into a dark room as a child. Your mind conjures all sorts of scary things that could happen, but as soon as you turn on the light, you realize there’s nothing to fear. Most of the business owners we know dread the thought of raising prices, much like the child who’s afraid to go into the dark room. Thankfully the reality is not nearly as scary as you might imagine. So let’s turn on the light and dive into why raising your prices might be an excellent idea.
Why We Are We Afraid to Raise Prices
Depending on what products or services your business sells, you may find it difficult to gauge what your competitors are charging. In a restaurant or retail space, it’s relatively simple since prices are easily obtained from a quick internet search. However, if you provide a service and are in an industry that does not typically make pricing publicly available, you face a more substantial challenge.
For those who don’t have access to competitor pricing, you might face the guessing game of where your pricing should be. You don’t want to price things so high that no one gives you a second look, but you also don’t want to price your products or services so low that you don’t make any money. You also don’t want low prices that position your product or services as “cheap” (unless that’s your intentional brand position).
Here are three reasons why many business owners are slow to raise their pricing:
- You think customers may leave or prospects will say no as a result. In our experience, we have seen that this is usually not the case. Most buying decisions are not based solely on price. There are exceptions, of course, but most buyers are looking at other aspects that influence how they value your product or service. Underpricing your service could lead to losing business because it creates a negative perception that the quality – or results – you provide are equivalent to the price.
- You undervalue your product or service. The majority of business owners we’ve encountered are humble, hardworking people. Coupled with that humility is a natural tendency to underestimate the value of the work they do. It can feel risky to charge a higher price when you don’t have a clear understanding of the value that you deliver. Talking with your customers can help you better understand the benefits they experience from your product or service, and in turn, give you greater confidence to charge more.
- You aren’t sure how much you should raise your prices. This situation is especially applicable in industries where competitor pricing is not readily available, as well as industries that are still young or have very undefined pricing. In either case, it’s important to listen for feedback from your customers and prospects who can give you information about how your services compare to your competitors. You may even have a few customers let you know that you are undervaluing your services.
Consider the Impact on Profit
Let’s get to the bottom line. Literally.
Did you know that raising your prices by 1% typically results in a 4% increase in profit?
So…if you have $1,000,000 in annual revenue with a 10% profit margin ($100,000), and you increase your pricing by 5%, your annual revenue increases to $1,050,000 and your profit would increase by 4% which equals an additional $4,000 in profit ($104,000 total).
Raising your prices can generate additional profit without adding new clients or workload. Having a proactive plan to increase your prices and communicate the increase to your clients is essential.
The Bottom Line
The fear of raising your prices can often be dispelled by shining the proverbial flashlight on your customers and your business. While most of us don’t spend more money on things that we want or need to, we also understand that at some point, prices will go up. We don’t want to be caught by surprise which is why our next blog post will focus on ways to raise your prices without losing customers. So stay tuned.
A Resource for You
Raising your prices is one of multiple ways to increase your small business profits. We created a free guide with seven ways to improve your bottom line. Download the free guide here, and you’ll be on your way to a more profitable year. You can also get in touch with our team if you would like to talk more about how we can help you run a more profitable business.