You Can Raise Prices, Even In This Economy

The benefit of raising prices is… well, isn’t it obvious? Given that it is so vital to long-term success, one would think that businesses had already figured out how to do it well. The truth is that despite watching Starbucks, Denny’s and Delta Airlines raise prices at the beginning of this year, many firms are wrestling with this challenge as they head into 2012.    

One of the primary reasons businesses raise prices is an increase in the costs of services and goods used in products they sell. Many companies avoid passing these costs along to their customers by cutting expenses in other areas. But after more than two years of cost-cutting and belt tightening due to the “Great Recession,” there’s very little left to trim. 

Typically, business owners’ chief concern is that all but the most loyal of customers will never be seen again, especially in this economy. They should look at this decision from another perspective: Not raising prices will, in many cases, put a company in even greater financial peril.

So the question really becomes not whether to raise prices, but when and how to do it. 

©iStockphoto.com/Jezperklauzen

Look at the experience of one local restaurant, which just struggled through a financially disappointing holiday season. The restaurant did plenty of volume, but profitability was way down because of rising food prices. The answer, of course, is to raise prices. Upping the price of $18 entrees by $5 is out of the question, but what’s the right amount to retain profitability and not jeopardize a meaningful number of customers? This restaurateur and owners of businesses in other industries first need to analyze the size and potential effects of price increases.

This analysis includes several key pieces of information: 

• Determine customers’ “resistance threshold,” that is the price point at which a business would begin to lose customers.
• Review the cost increases of raw goods/materials since the last time a business’s prices were increased.
• Figure out expected revenue and profitability using current pricing and compare to expected revenue and profitability (minus customer defections) with new, increased pricing.

In the new scenario, business owners may find that although revenue is lower, profitability has increased. This could create the opportunity to restructure into a leaner and meaner organization.  Following any price increase, it’s important to review numbers, to gauge how the price increase affected volume and sales.

Some thoughts regarding a potential increase in pricing:

• Do you have one or two key customers? Think specifically about how they will react to a potential increase. 

• Is the product or service receiving the potential price increase considered a “commodity”? That is, can customers purchase a similar product or service elsewhere and not be affected? If so, business owners need to be sensitive to competitors’ prices. 

• Does your firm add value to this product or service that other firms don’t? If so, this value-add supports a potential price increase. If not, business owners should think about how they can add value in order to raise prices in the future. 

• Does your firm’s customer service stand out? Again, this “extra” many times insulates you from customer defections following price increases. 

Raising prices has been and will always remain a challenge for many businesses.  With the right strategy and tools, it doesn’t have to be impossible.