The no. 1 reason why company owners are reluctant to raise their prices?
“I’m worried that our customers won’t like it, and we’ll lose valuable business. Instead of being better off, we’ll be worse off.”
I get it. Raising your prices can feel nerve-wracking, especially if you haven’t done it for a while.
So today I want to share with you the secret to raising prices in a way that doesn’t alarm your customers – but which has a tangible, positive impact on your business.
It’s simple, really…
Just raise your prices by a small percentage.
Say, for example, you were selling a £100 product. If you started to charge £104 instead, some customers might not even notice, would they?
Those that did probably wouldn’t care too much. It’s not like their investment has doubled, it’s just up by a paltry 4%.
“Ah,” you might counter. “But from our business’s perspective, it’s hardly even worth the bother! Raising our prices by 4% will take time and effort to organise. But it’s hardly going to shift anything for our company.”
Happily, you’d be wrong!
You see, chances are that just a tiny bit of that £100 is profit – let’s say, £15.
The other £85 you charge customers doesn’t end up in your pocket. It goes into covering your costs – things like paying your staff, buying raw materials and marketing.
These costs don’t change when you raise your prices – they stay exactly the same.
So if you start charging £104 instead of £100, your profit jumps from £15 to £19.
That’s a 26.6% rise…
…Which suddenly doesn’t sound too shabby, does it!?
In fact, it’s an enormous jump in your profitability — all funded at a relatively small cost to your customers.
And if your profit margins were even thinner – say, just £10 was profit – the rise would be even steeper, at 40%.
What would such a rise mean to you? What new equipment could you buy… How many new staff members could you hire… Which projects could you suddenly fund?
And what would it mean to your own income? What difference would it make to your mortgage payments or pension pot… Or your next holiday?
Granted, the numbers for your own company are going to be very different to my arbitrary example.
But the basic principle will still stand: Small rise in price equals a much larger rise in profit.
In fact, a famous study by McKinsey from the 1990s showed that increasing your prices by just 1% typically yielded an 11% increase in profits.
That’s one of the reasons I suggest regularly reviewing what you charge. Aim for once every six months.
What you mustn’t do is raise your prices randomly. You need a clear view of your sales figures, your expenses and your profits to make sensible financial decisions.
That’s exactly where we can help you.
We provide world-class financial management for companies turning over more than £1 million or £2 million a year.
Getting your pricing right is critical to good financial management, because it’s all about maximising your profitability.
If your accountant isn’t regularly looking through your numbers with you to uncover ways to become more profitable, it might be time for a more proactive, serious approach.
Hit ‘reply’ to this email or call us today on 01279 647 447 to discuss how our Outsourced Finance Department can help you become more profitable and grow much faster.
Warmly,
Garry
