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Pumping Up Prices
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Article 3: How To Calculate Price Increases
Determine how much to raise prices based on real-world factors, not guesswork. But, realize it’s still as much art as science.
For instance, if you’re a manufacturer, you probably set prices originally based on the per-unit costs of labor and materials, and then factored in a desired profit margin. Calculate your price increases the same way, but plug in any new, higher costs. Once you determine the costs, don’t forget to add in indirect expenses like utilities and interest on loans. Then divide by the number of units you intend to manufacture in a year to get your new per-unit price.
If you’re a service provider, you might have originally arrived at your fees by adding your total costs to the income you desired for the year, then dividing by billable hours to determine your hourly rate. Calculate increases the same way by plugging in the new, higher costs.
Whether you’re a manufacturer or service provider, the next step is the same: Compare your prices to your competitors’ prices.
Can you justify being higher by providing better quality or more customer care? If your prices are lower than competitors’, can you increase them without losing market share?
Another factor to consider is that every service or product doesn’t require the same profit margin.
You may sell many widgets, but few sockets. You might make widgets more attractive by keeping their price down (and your per-widget profit margin slimmer), yet still reap large profits because of the volume sales generated by low prices. But if your sockets don’t sell in great volume, you may need to increase the per-socket profit margin to make it worth your while to continue offering them.
Also consider the nature of your market. If you cater to price-sensitive bargain shoppers, expect a greater loss in the volume of sales with every price increase. Bargain shoppers are fickle and flee quickly to lower prices.
Part of calculating price increases involves timing, such as coinciding with clients’ circumstances.
For example, if you sell wholesale, and in August your retailers set the next year’s budget, it may be advantageous to increase your price in July. This gives them the opportunity to work your higher prices into the coming year’s spending plan.
Tip: Should you chase off some customers? Sometimes customers most likely to obsess about price are more trouble than they’re worth because they drain customer service resources with complaints and haggling.
A modest price increase can result in these buyers abandoning you. Good riddance. Not only can selling fewer items at a higher price produce a greater profit margin and more net profit, but it can also reduce hidden costs by saving you the time of having to deal with problematic customers.
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Pumping Up Prices
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