Business Journals Leadership Trust is an invite-only network of influential business leaders, executives and entrepreneurs in your community. Original article posted here.
Low prices are a great way to get customers in the door when you’re first starting. To keep those customers happy and returning, you always want to keep prices as affordable as possible. But markets change, and a variety of external factors can put pressure on your bottom line if you continue to honor your original prices.
So when is the right time to increase your rates? You don’t want to make quick, drastic changes that drive customers away, but you also don’t want to wait too long and hurt your internal operations. Below, 13 members of Business Journals Leadership Trust share one clear sign that it’s time to raise your prices.
1. Your internal software and equipment costs are going up.
In the IT industry, raising prices is an unfortunate necessity. When we start seeing the prices of the software and equipment we use to manage our clients go up, I know it is getting close to the time to raise our prices. We can absorb the increases for a while, but eventually, costs reach a point where we have no choice. – Diana Strader, Kappa Computer Systems LLC
2. Your product is more ‘elastic.’
Market research surveys can help a company understand the price elasticity of demand for their products. Having an elastic product means small fluctuations in price cause larger fluctuations in customer demand, while having an inelastic product means customers are largely ambivalent about changes in price. Price elasticity is one of the data points you need to understand to determine if it’s time to raise prices. – Vincent Phamvan, Vyten Career Coaching
3. You’ve added a feature that justifies an increase.
It’s time to raise your prices if you’ve added a feature that allows you to justify the increase. For example, we recently added a new service to our social media marketing called LinkedIn Lead Boost. Clients will pay more to get more value for their business, so you need to sell the new feature to its full potential. – Scott Scully, Abstrakt Marketing Group
4. Demand is high and supply is low.
If demand is high but the supply base is low, it’s time to raise your prices. In our industry (staffing and recruiting), it takes more effort to recruit candidates in times of low unemployment. Prices typically go up. We also have to consider pay and burden costs. – John Lewin, Stivers Staffing Services
5. Your contribution margin is negative.
Calculate your contribution margin (CM = total variable costs – total sales). Your prices are certainly too low if your contribution margin is negative. If you aren’t covering your total costs “fast enough” in any given month, then your prices have to increase or your costs have to decrease. If it’s easier to raise the former than lower the latter, then you need to increase prices. – Stephen Deason, The OPARASA Group, LLC
6. You haven’t raised your prices in over a year.
If you haven’t raised your prices in over a year, you may want to examine them. Even if you are at your target margins, consider small escalations based on your industry’s year-over-year escalation trends so you don’t end up shocking your customers in year three with a 20% increase they didn’t see coming. Your planning ultimately creates a better customer experience and supports continued loyalty. – Jalene Kanani, NOHO HOME by Jalene Kanani
7. Your close rate is too high.
If your close rate is too high, it means you’re giving away too much value or pricing yourself too low. Typically, business-to-business sales have a 20% conversion rate, so if your stats are much higher, you need to look at raising your prices. Alternatively, analyze your competitors and become a premium-priced offering. As long as you can deliver against the higher price, this is a very effective sales strategy. – Jay Feitlinger, StringCan Interactive
8. You’re trying to compete on price alone.
I wouldn’t try to compete on price alone unless you are huge. Provide value and be profitable. In the long term, it’s hard to win with low prices because bigger competitors will drive you out of business. Provide better, more competitive services and value and have reasonable, competitive prices. – Jonathan Miller, Parsonex Enterprises, Inc.
9. You’re at capacity.
When you are at capacity, you either need to increase capacity (which has the inherent risk of return on investment) or keep capacity the same and increase prices. The risk of increasing pricing is the loss of existing customers, so that has to be mitigated by new customer acquisition. Supply and demand dictate price. Keeping your finger on the pulse of demand is key. – David Sprinkle, Veritas Recruiting Group
10. You’re charging well below market value.
If your prices are far below the competition, you could be undercutting yourself. Your prices should keep up with the market value. Not only can this help you preserve your profit margins, but it’s a good strategy for pricing psychology. Rates that are too low could cause customers to wonder if the service will be low-quality or if they’ll be dissatisfied. – Matt Malone, Groundworks
11. Your employee margins are getting squeezed over time.
For business services, the average annual income per employee as it relates to average salary gives you a baseline of what your average contribution margin is per employee (even non-production employees). As you monitor this over time, you will see if margins are getting squeezed or expanded over time as workload and employee mix change. – Matthew Palis, Infront Webworks
12. Overall expenses are increasing.
Look at your market. Are your expenses going up? If so, then it’s time to make adjustments to prices accordingly. This can be tough for your existing clients who are accustomed to set prices. Make sure that you aim to always overdeliver. It’s the overall experience that will keep them with you. – Zee Ali, Z-Swag
13. Your customers and prospects are telling you it’s time.
There have been times when our business has been going gangbusters, and existing customers and new prospects have commented on the immense value we offer. When you start to hear that repeatedly, listen and take action! – Rachel Namoff, Arapaho Asset Management