Often the first, but least thought-through, idea to increase profits is to increase prices. If a $10 widget turns a $4 profit, a $1 price increase ought to make another buck, no?

Unfortunately, this naïve approach can achieve the opposite effect. At some point, higher prices decrease rather than increase your bottom line. Although customers will pay $10 for your widget, they may not be willing to fork over $11. In that case, you lose the sale.

Also, if competitors sell comparable widgets for $10.50, your customers may desert you for the lower price.

How can you increase prices without driving customers away?

There’s no guaranteed formula for how much you can increase prices before seeing diminishing returns. However, there are guidelines to stave off disaster while maximizing profit:

1. If you increase prices above competitors’, make it crystal clear in buyers’ minds that your higher price brings greater benefit than your competitors’ lower price.

2. Remind buyers how long it’s been since you increased prices, and how competitive your prices still are.

3. Test price increases selectively or in sub-markets to gauge customer acceptance. If sales don’t decline among trial groups, the increase may be tolerable for your wider market.

4. Compare and evaluate if sales decline. Gross increases in revenue may offset losses in volume, making the price increase worthwhile.

5. Finally, when appropriate, communicate full explanations of why your price increase is necessary.

Most customers understand if you must pass on increased costs of government regulations. Passing on the cost of raw materials that you don’t control is also palatable for customers. Explain those price increases so that customers don’t imagine you’re padding your profit at their expense.