Price Hikes are Vital for Protecting your Profits
Increase your Prices to reflect changes in costing, consumer knowledge and a premium value proposition
Profits are only impacted by two things – Prices and Amounts:
* Revenue = The Prices your customers pay multiplied by the Amounts customers buy
* Expenses = the Prices you pay multiplied by the Amounts you need to get your products and services ready to sell
Your “best price” is actually changing daily.
Yep, I know that seems a lot, but how often do your costs, competitors, or customers’ perceptions vary? – I’ll bet at least one of those changes pretty much each day… And I am also pretty sure, unless you are a fresh food producer selling at the wholesale market, your prices stay the same; probably year in year out?
You can control some of your costs, most of the volumes you buy, AND your price which need to incorporate many variables to safeguard profits. A great way to protect your profit is to hike prices at least once a year. I heard a great tip the other day – Hike prices on your birthday every year – that way you give yourself a nice present.
WARNING: If you want to go broke extra fast ignore how you set prices, simply ‘price everything to sell’ irrespective of what it costs to produce and deliver in your business. For more on this see a previous post – How to go broke fast!
But, before you start worrying about losing customers – let’s do some basic maths:
- If you raise your prices by 10% you need to also have 10% of your customers leave you before the price hike becomes detrimental to your profit.
- If you raise your prices by 50% then HALF your customers need to leave you before it becomes detrimental to your bottom line.
- If you raise your prices by 2% most likely no-one will object (or even notice)
Remember you can choose who you want as customers. Are the ones who are most price sensitive, and might leave as a result of a price hike, really the ones you want to keep, or are they the type of people that make your job un-enjoyable? If they are the latter perhaps it is best you let them go anyway.
Pricing well is a skill, and optimising your pricing almost an art-form
It is not difficult to build yourself a reasonable price hike, just make sure you cover the Four Cs:
The simplest, easiest, and therefore generally the least accurate pricing method, involves discovering what your competitors are doing and then setting your price to reflect theirs. This is a DANGEROUS APPROACH as it assumes your costs, and the return you need for your risks, are exactly the same as your competitors….That is really, really unlikely!
Your business; your investment; your risk; your needs; therefore YOUR PRICE!
On the flip side, it is important to understand what your competitors offer for the price their customers pay. The right knowledge enables you to differentiate your value proposition – ideally you will work out a business model that enables you to deliver to your customers for slightly less cost, and at a slightly higher price than your competitors. This step is also important to prevent pricing yourself out of your market – it is a vary rare business that is able to have a similar offering, charge far more than the competition, AND stay in business for long.