It seems like everything is more expensive these days, and many businesses have felt forced to raise prices just to keep up, let alone make a profit. Some business owners may hesitate to raise prices, fearing customer pushback or reduced demand.
In a perfect world, you could provide a high level of service and quality products to meet your customers’ needs while maintaining the same prices for years, but realistically, prices can’t stay static forever. Your pricing strategy must take into account both internal and external dynamics, such as brand positioning and market conditions. So, how do you know when it’s the right time to raise prices?
Reach out to a Business Banking Relationship Manager for a complimentary pricing consultation. To help you develop a competitive pricing strategy, we’ve put together an eight-question reality check to offer some guidance on when you might need to consider raising prices. Answering these questions should give you a solid framework for evaluating a potential price adjustment. Making informed decisions based on strategy—not fear—is the best path to profitability and customer trust.
1. Are There Market Conditions That Support a Price Change?
One of the first things you need to look at is external economic factors that might justify a price change. For instance, increasing inflation rates often contribute to rising labor, material, or transportation costs that might force you to raise prices just to maintain the same margins.
Certain market conditions can also have a bearing on your pricing decisions. Has there been a recent rise in demand for your products or services? Are your competitors beginning to charge more to adjust for market pressures?
Raising prices based on these types of economic factors is usually much easier to justify to your customers, which will help build your credibility and mitigate against potential negative backlash.
2. Does Your Pricing Match Your Brand and Growth Plan?
How have you positioned your brand in the market? Do you consider your business to be a premium brand focused on high-quality products or services your customers can’t get anywhere else? If so, raising your prices might actually benefit you in more ways than one: increasing profits as well as elevating your customers’ perceptions of your brand.
On the other hand, if your brand focuses more on giving your customers the best value for their money, you might have a more difficult time explaining the need for a price increase, especially when they are likely struggling with the effects of inflation as well.
What are your long-term goals for growth? Do you plan to expand into new markets? Are you thinking about repositioning your brand to target a different audience? Think about the message that you want your pricing to send and how that fits into your strategic plan moving forward.
Pricing that doesn’t match your brand values can negatively affect how customers perceive your business and weaken your long-term strategy.
3. How Will Your Customers React to a Price Increase, and How Will You Handle Negative Feedback?
The customer is king, so it’s important to consider how they will react to a price hike and how you will respond to their feedback. One of the best strategies you can follow is to be transparent about why you are changing your prices so they don’t feel blindsided or uninformed. This inclusion in the process is especially important for your established, loyal customers so they know you recognize their value.
Make sure you provide a direct channel that customers can use to provide feedback, such as an email address, web form, or toll-free number. Be prepared to manage customer feedback by building a customer service team equipped to resolve complaints and answer questions. Consider creating a short FAQ or blog post to explain the value behind your pricing.
Properly responding to your customers helps maintain a good reputation and positive relationships.
4. Will Higher Prices Reduce Volume, and If So, How Will It Affect Overall Profitability?
Demand for certain products, like gasoline, does not fluctuate much with price changes. In many cases, though, higher prices can reduce volume if customers choose to delay purchases, switch to a competitor, or buy less frequently. Even with reduced volume, though, your profitability could still increase if your margins go up more than your volume decreases.
To help you estimate the price elasticity for your business, you can review data you have on price changes in the past and the subsequent market reactions. If possible, you could also consider testing out a price increase on just one product or service or on a subset of your customer base. Another helpful tool might be to survey loyal customers to gauge their responses.
Simple Cost-Benefit Checklist
Costs to Consider
Benefits to Gain:
Risks to Monitor:
Next Steps:
5. Do You Know Your Margins by Product or Service Line?
Many business owners focus on their overall margins but overlook one essential metric: unit profitability. Understanding your margins by product or service line gives you a much better base for making informed decisions about pricing.
Remember that not all revenue is created equal. While two products or services might generate the same revenue, they might cost you different amounts in materials, time, labor, or support. You need to know what each unit costs you to really know which products or services are truly the most profitable.
Break down your profit margins by product or service line, factoring in all direct costs to calculate an accurate margin. Then, use this data to consider price adjustments and allocate resources where you’ll have the highest return, avoiding hidden losses from focusing on products or services that might be quietly draining your business due to thin margins.
6. Are There Product or Service Improvements You Should Make First?
If there is a way to increase the value of your product or service, your customers are much more likely to accept a higher price point. For example, think about upgrading your product, adding new features, or providing additional support or services right before changing the price. This can ease the transition for your customers.
7. How Do Your Current Prices Compare to Competitors’?
Do some research on your competition. You might be undervaluing your business if your prices are too low compared to your competitors’ prices. In that case, a price increase is probably in order. On the other hand, if your prices are already at the upper end of the market, a price hike might do more harm than good.
8. Is This a One-Time Adjustment or Part of a Larger Pricing Strategy?
Sometimes, a one-time adjustment is all you need, especially if you are just trying to offset inflation or the rising costs of material or labor. On the other hand, if you are developing a competitive pricing strategy to grow your business over time, you might need to think about alternative ways to incorporate tiered pricing changes, such as offering different price points for subscriptions.
In general, try to avoid frequent price changes or inconsistent pricing, which can erode trust in your brand and drive customers away. Instead, consider long-term pricing strategies, such as pricing reviews, bundling, and value-based pricing.
Conduct regular pricing audits (quarterly or annually) that take into account customer demand, inflation, market trends, costs, and competitor pricing to ensure your prices reflect current market conditions. Consistency is key here. When customers know when to expect pricing adjustments, they are less likely to respond negatively.
Many businesses also find success in bundling products or services to enhance the value for customers, making them willing to pay more. Microsoft 365, for example, offers several products (Word, Excel, PowerPoint, etc.) bundled together at a lower price than if customers bought each separately. Try to bundle complementary products or services based on your customer base’s buying behavior to further increase their perceived value as well as drive sales of underused products or services.
When it comes to value-based pricing, it’s all about the perceived value your product or service provides to your customer. Luxury brands like Rolex or Chanel tend to base their prices on brand prestige, exclusivity, and quality craftsmanship, rather than solely on manufacturing costs or even market factors. Survey your customers to better understand what they value the most and then price accordingly.
Let Us Help You Grow
Once you’ve worked through these questions, you should have a clearer vision for your competitive pricing strategy both now and in the future. As you work to balance customer expectations against market conditions and your long-term business goals, Riverview Bank offers a range of commercial banking services to meet your specific needs. Contact us today to find out more about how we can help your business grow.