When should you increase prices?

Pricing is an emotive subject and many clients are scared about increasing their prices.

So much so that many refuse to do so and the compound effect of not increasing prices has cost them tens, if not hundreds of thousands on lost profits.

Why are business owners scared to increase prices?

The reason why most business owners refuse to increase their prices are two fold;

  • Scared that their customers will leave and find a better price from their competitors,
  • Scared that their customers will view them as greedy,
  • Scared that their team will see their prices and expect an increase in salaries.

The truth is, none of the above usually happens and yet many entrepreneurs refuse to increase their prices.

This is a policy and thought process usually ingrained by the founder and it goes back to their time as a StartUp.

Do you remember that time in your business when you had immense passion that drove you to work countless hours, delivering an excellent service for what in reality is a pittance?

This StartUp entrepreneur mindset is usually one of growth. Hoping that by competing on price it will bring in more customers and with more customers then they can cover their costs.

But using price to attract customers will only ever lead to more work and the same margins.

With increased work, quality will suffer and what was once an excellent service will diminish, leaving the price lead customer feeling worthless.

Work harder, earn more

As business starts to ScaleUp, the StartUp entrepreneur finds themselves working longer hours for less.

They are typically then stuck in a endless loop of working too long but being unable to clone themselves or offload work to others as customers are used to working with them only.

Then they fail to recruit because of the fear that their customers will not want to work with new members of the team.

Likewise, they fear that their early customers are so accustomed to their prices that they will resist higher charges and simply move business elsewhere.

But where most business owners, managers and entrepreneurs fail is in understanding the impact of increasing prices.

In reality, if your profit margin is 30% and you increase your prices by 25%, then you will have to lose 45% of your customers before your business will suffer a loss of profit.

And what business will lose that amount of customers overnight? Not many.

The truth is, some will leave, but this will give you one of two things, capacity to attract the right customers at the right price and to become more profitable. Or simply to scale back, reduce your cost and do less work, but still earn more profit.

In reality though, a price increase is typically accepted by over 93% of customers and so it is a sure fire way of increasing profitability.

Price increase is just one factor in the profit equation.

Smart entrepreneurs realise that revenue is not just a function of price, but a function of price, volume and frequency.

Hence to built a business and really ScaleUp, the smart entrepreneur will look at clever ways to increase the average customer value by getting them to spend more (increase pricing), to buy more (increased volume) and to buy more often (increased frequency).

Or simply put, if you increase price by 20% and increase volumes by 20% and increase frequency by 20% then your sales will increase by 73%.

And you drive volume and frequency through offering additional value because you know how more margin, margin that you can use to contribute to offering value.

This is where the smart entrepreneur spends their time to really know their numbers. But not just any number, but the key numbers that are critical to track.

Knowing what these numbers are and tracking them is critical to getting your business going in the right direction.

Margin is key

Maintaining and improving margin is critical to growing a successful business and yet most entrepreneurs want to grow their sales first and foremost.

This is bonkers!

Every entrepreneur should look at how to increase their margin and use some of this in order to excite their customers. Only by delivering vast amounts of customer value can you really start to grow you business. By offering customers more, that doesn’t cost you too much more then they will pay you more.

That’s a lot of more, for everyone.

If you generate enough margin, then this throws off cash and then you can use that cash to invest in customer happiness.

And customer happiness will make your customers, and their friends love you.