Pricing your product is one of the most difficult aspects of any business. The point is probably obvious to any corporate, small business holder, or self-employed individual. One point of concern is that there are some marketers out there suggesting revenue difficulties can simply be resolved by raising the price. This may look like a nice solution but is it realistic. Price increases affect demand. So are you in a position to just add a few percent to your price without any impact. Especially when markets, corporate buyers and consumers are always displaying signs of price sensitivity, even in the good times.
If you get pricing wrong then you can have some spectacular volume changes.
I can draw from personal experience of working for in a franchised pizza market. As the Franchisor we saw a 9% increase in price result in an immediate 20% decline in weekly revenues, as customers reacted and volumes fell.
So when can you increase your prices?
As a reminder here are the 2 key economic criteria which drive price increases.
- demand increases for your product
- supply of available stock/resource decreases, (referred to as scarcity).
If you are a business operating where these conditions apply then you can increase your price. If not then here are more common factors for when and if.
Individual expertise
People whose time is precious and are experts in their field.They are usually the highest individual daily earners. And they can come from any field of expertise. The range goes from surgeons, through lawyers to tax accountants and hair stylists.
High value products
Precious commodities and craftsmanship. Diamonds and gold are precious in themselves. Often in limited supply their value increases through scarcity. When you add the value of skilled craftsmen to these scarce resources the end product can be priceless. Typically the price you can charge increases for these products. But be aware that the market can be affected by the volume of used items on offer.
Smart advertising
Aggressive and subtle promotion can create a perception that price equals value. The old advertising trick for perfume was always: the higher the price the better the quality. And more subtly,launching an expensive perfume was the best way to have it noticed and drive sales. Pity the poor husbands who are expected to pay for it. The idea of "Because I'm worth it" was already planted in consumer minds long before L'Oreal used it as their tag line in advertising campaigns of the 1990's.
Production costs rising
Trend of costs for material and labor will rise. In some markets the whole industry is affected by continuous price fluctuations. Energy is the most obvious of these and companies which supply the market apply price increases regularly. As customers we don't like it but the choices are limited
To look at the other side of the coin: when a business should not increase its prices. Clearly going against the trend without having any clear added value is potential suicide. As indicated from the example which opened this piece.
What holds true absolutely, is that any business type working in a commodity market cannot raise prices without some affect on its demand. In this context a commodity product is one that is readily available and so demand is highly sensitive to price changes. Even more, it can be said that price is the only factor which drives sales. Sometimes a particular market is so sensitive that even a very small price change can be enough to cause a business a significant loss of volume.
For businesses working in the food industry, the price of produce is rising. This affects caterers, bakers, and retailers who may have to raise their prices, albeit unwillingly. So here a price increase is a requisite to survival. But customers and consumers are reacting because price increases are unacceptable. So demand has fallen in these sectors. And one can look at retail in general where worldwide trends are down, as the cost of raw materials increases.
So the key questions for businesses become:
- Where do we stand?
- Can we raise prices?
- Will we suffer?
- If our competitors are increasing their price, should we?
The answer to any business is that where you have to take a close look at your own economic and financial data, knowledge, and experience. This will indicate how price and demand fluctuations have trended in previous years. When you raised a price previously was there a change in volume.
Ultimately, you may just be in a position where the only relief obtainable to a current situation has to be a price increase. Cost pressures are such that even if you edge ahead of the competition it just has to happen. Loyal customers may stay with you. Others, who only came for the price will leave. Attracting new business may be a problem. But that's called a business decision.
What is critical, and often overlooked, is how effective your marketing has been in the past and the current results being obtained. Irrespective of the size of business key marketing data is being delivered constantly. This ranges from simple statistics such as people visiting your store, website, or making inquiries. Recording the number of sales made or conversions. And knowing, precisely, product quantities sold and the prices they sold at. Add to that all the opportunities to test the market and engage with customers, then there is very little you won't know. The question is: are you capturing this data?
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