If you haven’t increased your prices for some time (or ever), here are five clues that may convince you it’s time to raise yours:
Clue #1 You’re working all the time
You put in 40+ hours every week and you’re not making as much as you want, plus the calls keep coming…
This is a very common scenario in the current gig economy.
People don’t necessarily plan to start a business – they start a “side hustle” simply to supplement their income and they often base their rates on what they’re getting paid by their employer.
Over the long term though this doesn’t work because as a business owner you wear more than one hat and you can’t be generating revenue all the time. When you start setting prices you need to factor in your desired income AFTER expenses plus how much time you really have to generate revenue.
Also, as your business grows, you need to have sufficient funds to pay other people. If you’re only charging what you make as an employee there’s really no way to leverage your employees to grow your profits.
If you’re working your tail off all the time and you have a line of customers waiting for you, it probably means that the demand for your product or service is actually greater than the supply.
Think back to your favorite economics class, remember that when demand is greater than supply it’s typically an indicator that pricing will be going up.
In a perfect world, you double your prices, lose half your clients, work half the time, and make the same money. That’s not always possible. But, if you have a waiting list, it’s definitely a sign that some type of price increase is likely to be readily accepted by your customer base – especially if they are willing to wait a week or more to work with you.
Clue #2 You have a low profit margin and think you can make it all up on volume
Margin is calculated as the selling price less the costs to deliver the goods or services. The amount that’s left over is used to pay for your overhead, to pay your taxes, and to generate profit. If this amount is very low, you have to sell a lot of services or product to get to your desired take home pay and income levels.
There are some industries that traditionally have very low margins.
For example, grocery stores and low-end retailers. However, we’ve seen over the last few years how hard it is to compete in a low margin industry. Big grocery store chains and box stores are able to do much more volume across the country than the smaller, local “Mom and Pop” shops who are going out of business because they can’t cover their operating costs.
In order to raise prices in these lower margin industries, there has to be some additional value available to the customer.
Why are people willing to pay more for food at Whole Foods than at Walmart?
Why are people willing to pay more for Calvin Klein jeans than Lee jeans?
Think about what makes your service or product special compared to the larger, commodity-level products and services and be sure to communicate that value to your customers to support a higher price.
Clue #3 Your main selling point is that you are cheaper than your largest competitor
I see a lot of small businesses advertising that they have the lowest prices in town, and it always makes me cringe.
When your biggest advantage is that you are the cheapest, you tend to attract the most price-sensitive customers. These customers are always looking for the best bargain. They are the type who will leave you in a flash because they scored a Groupon for that “half-off” massage.
In general, price sensitive customers won’t stick with you for the long haul. Keeping long term customers is extremely valuable for your business.
Another issue which is similar to the first point we discussed – many start-up businesses advertise that they are cheaper because they have less overhead.
That may be true right now, however, as your business grows and you need to add team members, eventually you may not be able to work out of your home garage.
Now you have added overhead, but you don’t have any money to grow because you haven’t factored those costs into your pricing.
Don’t think too short term when setting you pricing and analyzing your cost structure.
Look ahead 5 years – where will your business be then? How many team members will you need to have? What kind of facilities will you need? What about equipment? How will you fund those?
Clue #4 Its been more than a year since you last adjusted pricing
I think we’re all aware that prices increase.
In my own industry, we see accounting software price increases, staffing cost increases as the unemployment rate goes down, the latest and greatest technology is expensive, office rental occupancy rates in our area are high, which means commercial rents are more expensive. And at home housing costs are up, etc.
If you haven’t raised prices in the last year, you know you are falling behind. If your expenses have increased 3% and you haven’t raised prices, that cost increase is reducing the funds you have available to take home for owners pay and for profits in your business.
Clue #5 Your clients tell you that you’re not charging enough
I saved this one for last – if your customers are flat out telling you they would pay more for your product or service, THIS is an obvious message that you are undervaluing your product or service.
In a perfect world, we’d have a clear picture of how the outside world values our services and products. BUT, in reality, not everyone is going to assign it the same value. If you’re hearing from your customers on a regular basis that they can’t believe how cheap you are, or that they would happily pay twice as much, take them up on that offer!
Final thoughts
Often there’s a lot of fear for small business owners about the idea of raising prices.
What if all my clients leave? What if I have zero revenue? How will I pay the bills??
If the thought of raising prices still scares you too much, I would encourage you to at least start raising the prices for your NEW customers.
After you have some customers willing to pay the current fair value for your products or services, you will gain the confidence to increase prices across the board.
