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Increase Pricing The Right Way

An ongoing dilemma with small businesses and SMEs is figuring out how to successfully raise prices without alienating customers resulting in an eventual loss of business. A business might want to raise prices (1) to compensate for higher operating and inventory costs or (2) based on improved products or services.

Why Raise Prices?

When inflation and vendor pricing cause costs to increase, a business has several choices to consider. It can find new vendors with lower costs (if possible), absorb the additional costs to the detriment of net profit, or increase prices to its customers. Of course, for some costs there is no replacement alternative, i.e. utilities, taxes, licenses, etc.

When products or services are enhanced, a business must also consider whether to raise prices to compensate for the improved offering to customers. A competitive advantage as a result of product and/or service uniqueness or differentiation allows a business to command higher pricing.

Pricing Decision

A difficult decision for a business is how to successfully raise prices while still retaining loyalty in a competitive environment or, perhaps, in a sluggish economy. Every business must maintain a certain profit margin to not only remain profitable but also to experience annual growth. Although some businesses might sacrifice current profits to ensure customer loyalty, ultimately prices must be increased based on operating costs and improved products and services as a safeguard to business longevity.

Assuming the business strategy is not to be the lowest cost provider, the following are five practical ideas to increase pricing while still retaining customers and their loyalty:

(1) Develop a Pricing Strategy - There is more than one way to effectively increase pricing. A business must decide if it wants to raise prices a little at a time (incrementally) or all at once (immediately). Obviously, incremental price increases take longer to achieve the optimum desired price but, ultimately, the target price is attained. While either approach works, it is important for a business to understand its customer base. One approach might be acceptable to one business' customers whereas another approach achieves greater acceptance with its customers. Implementation success is a factor that must be considered.

(2) Be Transparent - First time or infrequent customers will probably never know if prices are increased; however, they will most likely check the competition. For loyal customers, transparency can be a key ingredient to successfully raising prices and retaining customers. When customers know in advance that prices will be raised on certain products or services and, perhaps, the reason behind the increases, the increases are generally more acceptable.

(3) Consider Variable Pricing - Rather than raising prices on basic products or services, additional profits can be realized through "add-on" pricing such as: offering quantity discounts, extended warranties, personalized customer service, or preferred customer incentives as inducements to increase purchases. Consider any type of creative pricing to increase revenues and profits.

(4) Stress Value - While many businesses use product and service descriptions to market and sell, a company stressing value can set itself apart from its competition. Higher quality products and services justify higher pricing. Buyers, however, must understand the differentiation between what is offered by one business versus another business. It is critically important for customers to comprehend that quality, service, uniqueness, etc. are worth a higher cost.

(5) Educate Employees - Since employees are the link between a business and its customers, employees must understand any new pricing structure and the reasons for price increases. When questioned by customers, employees must be able to give accurate information and adequate explanations.

Increase the Right Way

Businesses should not shy away from raising prices. Pricing increases, however, must be handled the right way to achieve the business goal of increased revenue and net profit.

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