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Pumping Up Prices
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Article 2: When To Raise Prices
There are at least three occasions when it’s appropriate to raise prices.
When competitors do When rising costs and expenses require it When you can
First, if all other factors remain constant, you can justify increasing prices when competitors do simply because the prevailing rate will protect you from being undersold.
If you have run an efficient business, you may even find yourself benefiting disproportionately.
For example, if competitors increase prices to keep pace with their own increasing costs, but you have held your costs down, the effect of across-the-board price hikes for your industry means your profit margin will widen while your competitors’ will remain the same.
Second, when you originally set your prices, you calculated them (or at least you should have calculated them) in part based on your expenses and costs of doing business. When those expenses and costs rise, your profit margin shrinks. At some point, a shrinking profit margin becomes unpalatable, or worse, unprofitable – unless you increase your prices to compensate.
If you wait too long to adjust prices to accommodate increasing costs, you may require a price hike so drastic that the sticker shock will drive previous buyers away in droves.
For this reason, it’s prudent to periodically review your costs and expenses to gauge profitability. Infrequent, modest price increases can be more tolerable for buyers than once-in-a-blue-moon astronomical price hikes.
Don’t forget when reviewing your profitability to factor in indirect costs. In addition to costs of labor, production, advertising, marketing, operating expenses, taxes and other obvious expenses, the sometimes overlooked indirect costs, such as utilities, licenses and insurance, can shrink profit margins too.
Third, let your conscience be your guide, but feel free to increase prices if you can. You’re entitled. There are no magically arrived at profit margins. Nor are they written in stone.
If you can operate at a 5-percent profit margin above expenses, why charge a price that generates only a 3-percent profit?
Remember, the absolute judge of your fairness is the customer writing checks for your goods and services. If buyers continue to pay at higher prices, they are voting with their dollars to endorse the value they perceive at the price you charge.
One caveat: Greed is an ugly trait in business. And squeezing as much as you can out of your customers may mean short-term gain but long-term losses if they come to realize you’re soaking them rather than serving them.
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Pumping Up Prices
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