Secret 71: Price Increase Margins Matrix

Raise your prices. This is practically the first answer I give as an advisor to any business client or to anyone asking for good ideas in business. It’s a strategic decision in every business I operate. If you want to play in the marketplace, play at the top end. Raise your prices.

Every time I recommend this tactic, the immediate pushback response is, “Oh, we can’t do that, our customers won’t like it.” Absolutely wrong! When it comes to price, businesses tend to misread their customers. In fact, the vast majority of the time, customers don’t even notice a price increase.

For example, say you’re a customer who buys a widget every month for $49.95, then one day its $52.49. Do you really notice the price difference? No, because mentally you still round it off to $50. It’s effectively the same price to you. Does it stop you from buying? No, because you aren’t that price sensitive about something you buy all the time.

But let’s say that a customer asks why you raised the price. In that case, you and your team should have a reasonable explanation at hand. In the audio production business, we simply present the facts: “Yes, prices have gone up on a few items because we’ve had a pretty serious increase in our rent, taxes, and utility costs. We have absorbed some of the increases and had to pass some of it on to our prices.” People understand that businesses have costs that tend to go up. Of course, there’s the occasional wing nut who believes everything should stay at 1982 prices, but those aren’t the customers you want to keep.

Prices shouldn’t go up radically. Try a 3 to 5 percent increase, then evaluate what happens. Usually, what happens is absolutely nothing. Prices go up and business continues as usual. After a few months, once you see there’s been no significant backlash, raise the price again by another 3 to 5 percent. Keep raising incrementally until you notice a change, receive comments of concern, or until you see you’re winning less business in bids, quotes, and estimates.

An import factor is to keep the price high enough that it challenges you to offer more. Many business owners shy away from price increases because they don’t feel confident enough that what they’re offering really deserves a price increase. They believe they are offering average services or products that should be priced accordingly. Instead, raise your prices and use that as internal pressure to deliver higher-quality goods and services. Innovate so you can offer more to your customers and earn a higher price in return.

The power of raising your prices is that the additional monies go directly to your bottom line. A higher price is simply margin added on to provide additional cash flow to your business. Profits are often elusive in business because services and products are underpriced. Most companies can raise prices several times before clients and prospects even begin to notice and change their buying decisions.

Unless you start to lose deals consistently, I suggest leaving the higher price. I would lower it only if there is considerable pushback. The funny thing is that there is never considerable pushback. The increases are so incremental that people don’t notice. If there is a little lost business, it is often less than the new margins. More profit on fewer deals is still good.

As an entrepreneur, if you want to increase profit, raise your prices. If you want your statements to look better for the bank, raise your prices. If you need to stop using your line of credit for cash flow, raise your prices. Many different cash-related issues have one solution: raise your prices!