The work has been flowing in but your team is starting to get overwhelmed.
You're quickly reaching capacity.
You enjoy working with your clients, but you've noticed that the ones who have been with you for a while are not paying the same rate as the new ones you're quickly bringing on.
There's a huge pricing imbalance!
Whether you've been running your business for a decade or just a few years, your pricing can change rapidly depending on the work that you're bringing in.
Generally, price setting is a daunting task for any business owner. When it comes to evaluating and raising prices, it can feel like there's even more pressure.
At times, price increases become necessary for sustaining growth and ensuring the longevity of your business. Below, we'll discuss the why, when, and how of raising your prices while maintaining a healthy relationship with your customers.
Why You May Need to Raise Your Prices
Your costs have gone up.
You're delivering a massively more value service thanks to a key optimization.
Maybe your strategic market positioning has changed and your service is now aimed at a different kind of audience than before.
These are some of the key reasons why a price increase may be necessary. Adjusting prices can ensure financial sustainability and promote growth, whether you're experiencing a surge in operating expenses, investing more in product development, or aiming to reposition your brand within the market.
- Increased costs affect entire economies. As costs increase throughout the market as a whole, most businesses are forced into increasing what they sell their product or services for. Whether it's a cost of materials, labor, or general overhead, you may need to raise your prices to maintain a healthy profit margin.
- Delivering more value is an exciting development for any product or service offering. If you're able to give your customers a groundbreaking experience that helps them considerably improve in some way, your pricing should change to reflect the increase in value that you're offering! Whether it's quality enhancements, additional features, or more access to your team, it's important to understand the value that you're bringing to the table.
- Your position in the market reflects how prospective clients see your brand and service offering. Understanding how your product or service is positioned in the eyes of your customers allows you to understand the ways in which people will relate to your product, whether in a particular industry, level of desirability (luxury or premium), and more.
- Growth and opportunity both come at a cost. As your business grows, your operational costs will most likely increase! Your pricing needs to support the staff, locations, technologies, and efficiencies you bring when working with a prospective client.
Raising prices can be a strategic move that not only covers increased costs but also accurately represents the value you provide, supports your brand positioning, funds business growth, and ensures you meet your profitability goals.
The New Price: The How and The How Much
If your business is frequently grappling with cash flow issues even when your sales are booming, or if your growth trajectory is lackluster despite the high value you deliver, these could be flashing neon signs indicating that it's time to hike your prices.
The task of determining your new price doesn't have to be a guessing game; knowing that you need to raise your prices necessitates an examination of a few key factors. Mainly, you'll want to take a look at your operating costs, the value perception of your customers, and possibly even the pricing techniques employed by your competition.
Let's break it down a bit further:
Cost-based Pricing: This method involves calculating costs related to creating your product or service and then adding a markup percentage for profit. For example, if it costs you $50 to produce a product and you want a 20% profit margin, your selling price will be $60 ($50 cost plus $10 profit). This approach ensures that you cover your costs and make a profit on each sale.
Value-based Pricing: This strategy takes a customer-centric approach. Instead of pricing based on your costs, you price based on the value your customers perceive they get from your product or service. If your customers believe your offering provides them with high value, you can command a higher price, even if it costs you a lot less to produce.
Remember, the price you set communicates value in your customer's mind.
A higher price can often indicate superior quality or service. As you reassess your pricing strategy, ensure it aligns with your brand positioning and the value you deliver.
It's not just about covering your costs; it's about reflecting the real value your business brings to your customers.
How to Tell Your Customers
Communicating a price increase to your customers is a delicate process. Of course, you don't want to fray your existing relationships with your customers, if possible!
Still, you need to be clear and upfront about your intentions.
The key is transparency and advance notice. Explain the reasons for the increase, whether due to rising costs or enhanced service offerings. Assure them that the decision was made with careful consideration and that it's necessary to continue to offer them the quality and service they've come to expect.
- Transparency and Open Communication: When you've decided to raise your prices, open and honest communication with your customers is crucial. Explain why you're raising prices, detailing the increased costs, added value, or growth needs driving this decision. Customers appreciate transparency and will often understand the need for a price adjustment when provided with a rationale.
- Timing is Key: Choose the right time to inform your customers about the price increase. If possible, notify them well in advance so they can plan their budgets accordingly. Also, consider the current market conditions and your customers' economic situation when deciding when to implement the new prices.
- Highlight the Value: When communicating the price increase, emphasize the value your product or service offers. Reinforce how your offerings solve their problems or enhance their life or business. This approach shifts the focus from the price increase to the benefits and value you provide.
- Be Prepared for Feedback: Not all customers will receive the news of a price increase positively. Be prepared to handle objections and negative feedback. Stay empathetic and responsive to their concerns, and reaffirm your commitment to providing quality products or services.
Raising prices is an inevitable aspect of doing business. It doesn't have to be intimidating or massively difficult!
By understanding why and when to adjust your prices and having a well-thought-out communication plan, you can navigate price increases to maintain customer trust and promote business growth.
It's crucial to work with a well-qualified accountant or financial coach to understand and evaluate your current pricing structure and how you might be able to adjust it in the future.
Remember, a well-justified price increase can improve your bottom line and reinforce the value you offer to your customers.