All too often we see that when a business sets their prices too low, it ends in cash flow issues. All because the business owner refused to review their prices let alone increase them.
If you don’t review your prices and your margins are too tight, you won’t build up surplus cash to help you make it through while waiting for your customers to pay you.
Without this cash buffer from adequate margins then you won’t be able to pay suppliers until your customers pay you (unless of course your financing your business courtesy of HMRC and their VAT).
No business owner enjoys robbing Peter to pay Paul and this vicious cashflow cycle is the root cause of many stressful days and eves, both in work and then once back home.
A key to ensuring that you have sufficient margin is to ensure that your prices are set at a level that enables you to maxmise your profits while remaining acceptable to your customers.
This is why is it critical to review your prices, often.
We often see businesses who are reluctant to increase their prices for fear of losing customers. Yes this can be a risk, but if you are delighting your customers then that risk will be relatively low.
Without at least annual price increases you’ll become less profitable over time – that’s the inflationary effect.
Plus if your costs rise and you don’t adjust your prices then your margin will dwindle further, so in real terms you will be earning less today than you did last year.
If others (your competitors) are increasing their prices then the value of what you sell in your market is increasing and you are leaving profit on the table
This is when Sound knowledge of your market is essential if you are considering whether your prices are too low and whether customers will respond to a price increase.
If a price increase isn’t possible, then the only way to maintain margin and hence profit is to cut your costs or settle for reduced margins.
It is often useful to mystery shop your competitors if your market knowledge isn’t current. Knowing just how much your competitors charge and what they provide for that charge is invaluable data. If you don’t believe this then consider why do supermarkets provide you with exactly how much you’ve saved by shopping with them today. This isnt just cheap supermarkets either, even Waitrose offer a price match on branded produce.
By either matching or lowering price or by increasing price but offering additional value then your customers will remain loya.
The best way to explain prices rises?
Send your customers a letter and explain that your costs have risen and therefore your price will increase. They key to this is to give them notice and we advise at least three months. This way they are used to it when it happens and you have two months to remind them of the value your provide before the price rise kicks in.
That’s our little nugget for you.