How to Thoughtfully Increase Prices
Recently I have come across questions from small business owners regarding whether or not to raise prices, especially during the time of Caronavirus. If you have decided that you would like to increase your prices, this article will help you navigate the process thoughtfully.
While price increases can elicit a strong emotional response both from the buyer and the seller, I prefer to take a more analytical approach through a real life pricing conundrum I came across in which an analytical approach would not only solve the short term, but assist in long term business growth.
A coffee shop owner approached a group of professionals and asked the following question: “Every year I raise the price of my coffee by 1NIS, but this year, because of Caronavirus I’m not sure if I should do it, what do you think?”
The replies circled around the idea that said coffee shop owner offers a great product and therefore deserves the price increase.
A quick check for the average price of coffee in Israel since 2017 revealed some interesting information most notable being that the price of coffee in Israel is increasing at much higher rate than inflation, but I digress.
What we can clearly see from the above charts is that by arbitrarily increasing of the price of a cup of coffee by 1 shekels every year, the prices are no longer competitive within the café industry, but the profit margin is going down since 1 shekels becomes a smaller percentage with each price increase.
Calculating Price Increases Effectively:
Remember when you opened your business and you calculated your original prices? You probably calculated all your overhead costs and then added what you felt was a reasonable profit margin and compared within your industry to get to a final number.
So, increasing your prices is done in a very similar fashion, to effectively increase your price, you need to calculate the percentage your overhead costs increased, add the calculated percentage to your products or services and do a quick industry review. Of course, you can decide to add or subtract a few shekels here and there for marketing purposes, but that boils down more to marketing strategy.
Price comparison and increase calculations can take some time and are often not the number one priority of a small business. Whether you are interested in a market analysis to keep your business competitive or a new pricing strategy is in order, Bool is here to help. Please do not hesitate to contact me at: firstname.lastname@example.org
Please stay tuned for my next article which will discuss raising and lowering prices specifically during times of economic difficulties.