Is It Time for a Price Hike?

The decision to raise prices is one of the most difficult choices executives make. Will existing customers flee to competitors? Will new customers look elsewhere?

It may be impossible to predict the outcome, but one thing is for sure: if you fail to examine your costs and pricing periodically, you could be cheating yourself and your employees. As you consider a possible price increase, examine management, the marketplace, and the quality of your products and services to make an informed decision.

First, manage more efficiently. Raising prices is only one way to increase profitability. Before you hike prices, consider management improvements that may boost the bottom line immediately. Look for inaccurate billing and time keeping, high accounts receivable, workflow bottlenecks, high employee turnover, poor cash flow predictions, and other indicators.

Know your costs and price accordingly. The price of your products or services must reflect a realistic calculation of your costs. In recent years, the cost of everything from rent to energy has climbed significantly. If your costs have gone up but prices haven’t, you’re working just as hard for less money. Examine the costs of labor and overhead and make sure your pricing reflects today’s reality.

Compare to your competitors. How do your prices stack up against competitors’ prices? If yours are significantly lower for a product or service of comparable value, make an adjustment.

Consider quality. A Mercedes and a Dodge don’t sell for the same amount for a reason. Quality, perhaps more than any other variable, determines price. In fact, you may lose sales to competitors if your price is too low—customers may assume your quality is lower. If you have invested in quality improvements without adjusting your price, you may be cheating yourself. If you offer a higher standard of service than competitors, at a much lower cost, it’s time to change.

Just do it! If it’s clear a price increase is justified and required, don't agonize. Just do it.

Depending on the nature of your business and your relationships with certain customers, you may want to provide advance notice of a price increase. If you do notify them in advance, be sure you know how to explain the reasons for the change.

First, be matter-of-fact, not defensive. You are not doing anything wrong. Price increases are a fact of life, a legitimate response to increases in costs or innovations in quality. Reasonable customers will understand.

Remember, there’s always someone cheaper. Clients looking for lower prices can find them. Remind clients that they cannot find the same level of quality, service, and dependability elsewhere at your price.

If increased costs or improvements in quality justify a price increase for your business—do it. Chances are that it will be more significant to you than to most customers.

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