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How do you increase prices? 5 customer obsessed tips

how-do-you-increase-prices-5-customer-obsessed-tips

One of the hardest things you can do as a business owner is to put up your prices. Nevertheless, it's one of the most important things that you need to do regularly to ensure you keep making steady profits. In this post we’re going to take you through an approach you can use to assist you when putting your prices up.

Why increasing prices annually is important

Increasing prices is one of the best things businesses can do to increase profits. Annual inflation every year in western countries is between 1% and 2%, meaning that if prices aren't increased, profits are likely to decrease. Making it important to review and increase business prices annually. Ideally price increases will be combined with a corresponding increase in the value provided to customers, so that customers have a positive experience of the price increase, reducing the impact of customer churn.

1. Why putting up your prices is indispensable

Putting up your prices is one of the best things you can do to increase your profits.

Another reason it's really important to increase your prices each year, is inflation.

Inflation in most western countries is somewhere between 1% and 2%. So every year your overheads are likely to increase and your employees will expect increases in their salaries. If you don’t put your prices up to account for this, the profits you earn will decrease in real terms.

The problem for numerous business owners, is they’re scared that putting up prices will irritate their customers and result in lost revenue.

The thing is, it will probably irritate your customers if they aren't getting any more value than they were before.

That's why it's best not to blame your price increase on inflation. You might get away with it the first time, but if you keep doing it, you'll end up exasperating your customers increasing the likelihood they'll walk.

2. How can you add value and justify your price increase, without eating into your bottom line

If you want to put up your prices and keep your customers delighted, work out how you can provide them with significantly more value than you’re increasing your prices by.

The trick is to work out a way that you can provide that additional value at little or no additional cost.

Most organisations have the ability to add more value and little to no extra cost. 

5 opportunities to justify price rises by adding value at little to no extra cost

Here’s five ways that businesses can add more value, with little to no extra cost.

Prefer a video? You can watch this in the video below.


a. Offer partner discounts that add value at little to no extra cost

The first idea you can use, is to find partners who are willing to provide exclusive discounts to your customers that you can offset against your prices. Some partners have referral commission structures. If you have these, instead of taking the partner commission, you could negotiate an exclusive discount for your customers.

b. Create a customer community

The second thing you could do is to create a community for your customers. If your customers share things in common and would find it valuable to network with each other, you can create a community for them.

c. Set up a reward system for regular customers

Another popular approach is to build a reward system for regular customers. This encourages good customers to become more valuable and adds value to them because they get something back for being a good customer.

d. Create limited edition products or services

The fourth thing you can consider is to create limited edition products and services. You can use this to maintain prices, by adding more value, when you might ordinarily run a sale or drop prices. In some industries people love limited edition products and services, so it could even become a regular part of your business.

e. Bolt on products or services

And the fifth thing you can look at is to identify optional products that you don’t sell as frequently as you’d like to, but that add considerable value to your customers. Package these optional products into your product and include them as standard.

Hopefully those 5 ideas have helped you think about how your business can add more value to your customers, without it costing you more. By adding this value, you should then be able to confidently increase your prices without worrying about losing customers.

3. Work out the customers you can lose and still make the same profit

Understandably apprehension can kick in when you increase your prices. By taking the steps above, you’ll be a lot less apprehensive than if you hadn't taken them.

The chart below should also serve to ease your anxiousness. It shows the volume of sales you can afford to lose and generate equivalent profit, when increasing prices at various gross margin levels.

Table 1: How sales can decrease as a result of a price increase 

 

Existing percentage gross margin

 

5

10

15

20

25

30

35

40

50

% price increase

Percentage unit/volume decrease to generate same gross margin (% of sales volume you could afford to lose and maintain the same margin)

2 ▴

29

17

12

9

7

6

5

5

4

3 ▴

37

23

17

13

11

9

8

7

6

4 ▴

44

29

21

17

14

12

10

9

7

5 ▴

50

33

25

20

17

14

12

11

9

7.5 ▴

60

43

33

27

23

20

18

16

13

10 ▴

67

50

40

33

29

25

22

20

17

15 ▴

75

60

50

43

37

33

30

27

23

Both charts from Bright Marketing - Robert Craven (https://www.amazon.co.uk/Bright-Marketing-Small-Business-Startups-ebook/dp/B005TGZE60)

This second chart shows the opposite; the amount of business that you would need to increase by, to counteract the effect of a drop in price.

Table 2: How sales must increase as a result of a price decrease 

 

Existing percentage gross margin

 

5

10

15

20

25

30

35

40

50

% price decrease

Percentage unit/volume increase to generate same gross margin (% of additional sales volume needed to maintain the same margin)

2 ▾

67 25 15 11 9 7 6 5 4

3 ▾

150 43 25 18 14 11 9 8 6

4 ▾

400 67 36 25 19 15 13 11 9

5 ▾

  100 50 33 25 20 17 14 11

7.5 ▾

  300 100 60 43 33 27 23 18

10 ▾

    200 100 67 50 40 33 25

15 ▾

      300 150 100 75 60 43


This is an ideal scenario, as many businesses can have a large percentage of their business with a small percentage of customers. If this is the case, then it's important to approach your price increases with caution. Ideally you’ll factor price increases into your agreements with your customers. That way it is part of the agreement, they expect it and it avoids complicated conversations on your side.

If you have this type of agreement in place or are considering it. Use the steps above to consider how you can increase the value your customers receive without impacting your margin, that will mean your customers value the price increase.

4. Put price and value increases into action and diarise it each year

As we’ve said above, it is best to include price increases as part of your agreement with your customers. That way when it comes to renewal time, they are expecting a price increase and it makes your discussions with them much easier.

When you also increase the value that you provide to them, to offset the price increase, customers will be pleasantly surprised with your approach.

When you've worked out how you can increase the value you provide to justify a price increase, make sure you plan in value and price increases each year. Doing this you’ll offset the effect of inflation on your profits and sustainably grow your profits and organisation.

5. Notify your customers before you send your invoice

Be proud of the value you are providing to your customers and proud of increasing your prices. Communicate the price increase a decent amount of time before it happens to your customers. Yes it will give them time to look for an alternative supplier. However, your confidence of the value that you are providing and how it compares with your competitors, you will boost your confidence that they will stick with you.

We hope you’ve found these suggestions valuable. Subscribe to our weekly email to receive regular inspiration like this to grow your organisation.

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