The Procrastination Penalty (Part 4 – Price Increases)

The Procrastination Penalty

(Part 4 – Price Increases)

 

Instinctively we all know that it would be great to raise our prices. We also logically understand why sooner rather than later would be good for our business.  Why then are we reluctant to raise our prices?

Businesses are often reluctant to raise their prices, even, when necessary, because of concerns about customer reactions, competitive positioning, and broader economic implications. Here are the key reasons for this hesitation:

1. Fear of Losing Customers
2. Competitive Pressure
3. Economic Conditions
4. Brand Perception
5. Internal Resistance
6. Communication Challenges
7. Short-Term Focus
8. Regulatory and Industry Constraints
9. Psychological Barriers

We have written many articles on how to calculate pricing and price increases, but this article is designed to discuss the when and why rather than the how.  Please refer to previous articles for the mathematics and mechanics of price increases.

The list of 9 common reasons to procrastinate on increasing prices above, all boils down to the first one which is “Fear of Losing Customers”.

Let’s look at if this fear is justified.  From a customer’s point of view, we never like any increase in prices, but finding our pain threshold for pricing you will find that it is almost always greater than the present pricing, and higher than you would imagine.  You will be surprised how few customers you will lose when you increase your prices. I’ve always deferred to the adage, “Price is an issue in the absence of value.” If you have a branded product that is available many other places, price increases may have their detriment short of customer loyalty. Timing, availability and convenience shopping with you may tip the scale.

Having said that, how many customers can you afford to lose?   Please remember that price increase money will drop straight to the bottom-line, therefore if our bottom-line profit is 10% and we take a 10% increase in pricing, then we have effectively doubled our bottom-line profit. I would argue that this is a solid argument for a price increase if you are on the fence.

This allows us to still be more profitable even if we hypothetically lost 10% of our customers.  Your mileage may vary depending on your cost of goods sold (COGS), and present bottom-line profit, but typically a business can withstand a loss of about 30% (on average) of its customers from a 10% increase and still make as much money as it was prior to the increase (with reduced work and effort).  I submit that you will lose nowhere near that number, usually about a 3-5% loss of customers is normal. This math has been presented in my career over and over and proven to be quite accurate in most cases.

So, a price increase can be very profitable event even with an average loss of customers, and if you haven’t done one for quite a while my experience is you will lose ZERO customers.  Every business should at least evaluate whether and how much they should raise their prices every 6 months. If you are carefully monitoring your COGS price changes, you can more accurately calculate the changes of price increases.

A word of caution; avoid “price shock”. Do not raise prices too high and/or too fast.  Customers understand prices increase of 5, 10, and even 15% if it has been a long while since your prices went up.  But 20, 30% or more will be hard for them to justify doing business with you. Put yourself in the consumers seat; what would make YOU switch up your resource for buying choice?

If you have been postponing increasing your prices, do it NOW!  And then consider doing it on a regular schedule.  Watch your numbers, and it will be evident when you are getting close to the buyer’s pain threshold.  You have an obligation to your business to maximize your profitability to bring more stability and growth to your enterprise.

Below are some things you can do to overcome any reluctance:

1. Justify the Value: Clearly communicate why the price increase is necessary, emphasizing quality improvements, cost changes, or added value.
2. Monitor Competitors: Understand how competitors’ price their offerings and use this information to position the business effectively.
3. Segment Pricing: Gradually implement price increases for specific customer segments or products to test the impact.
4. Educate Teams: Train employees to confidently explain the reasons for price changes to customers.
5. Add Benefits: Introduce enhancements to products or services to justify the new price point.
6. Plan Strategically: Implement incremental increases over time to reduce shock and allow customers to adapt.

As business owners we often undervalue our work. While raising prices can be challenging, it is necessary to maintain profitability and sustain growth. By carefully planning and communicating the change, businesses can minimize risks and maintain customer trust.

Please feel free to investigate previous articles or to reach out when needing help with pricing calculations. There are many apps and calculation tools available on the internet if you choose to search them out. The math isn’t particularly difficult if you understand the variables require for the calculation but having that tool available in your accounting could prove valuable over time.

 

 

 

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