When Norm Brodsky writes about business, I listen to him. A veteran entrepreneur whose six businesses include two in the $100 million range, Brodsky writes the occasional essay for Inc. magazine.
Recently, he wrote a piece for Inc. on the case for higher prices. It was smart stuff street-smart and wise advice for anyone in business.
As a consumer, Brodsky likes low prices, but as a businessman, he says it is a sound business practice to raise prices regularly.
Bad Things Can Happen to You If You Arent Brave Enough to Raise Prices
With some notable exceptions (where you can lower production costs through innovative technology), its true. If you dont raise your prices, your profit margins will shrink which will undermine the financial foundation of your business. If you are not careful, Brodsky says, you could wake up one day and discover youre in serious trouble. At that point, you may have no choice but to take the kind of action that will drive your customers crazy.
He gives the example of his wifes hair salon, which suddenly jacked up prices as much as 85% and lost customers because of it. I dont have a choice, the salon owner told Brodsky. We havent had a price increase in 10 years. Ive been giving the staff raises every year, and I havent been getting any additional income. Now Im at a point where I cant go on without a significant increase. I wont be able to pay my bills. The place wont survive.
Had the salon owner gradually increased prices instead of keeping them the same for 10 years and then making a single, dramatic adjustment he would have lost almost no business. Plus he would have kept up with gradually rising expenses.
Dont Expect It to Be a Cakewalk
Its not easy to raise prices. Everything resists it, including your customers and your fears of losing business. If you do a lot of direct marketing, you know that if you test one price against the other (all things being equal) the lower price usually wins . . . even if you count lifetime value.
Nobody likes inflation, but its a fact of life. And if you are going to keep your business profitable, you are going to have to raise your prices.
You can do so the foolish way wait 10 years and then hike them like crazy or you can increase them very gradually 2% to 5% a year. The first time you raise them, there will be some resistance, but if the amount is small and you do it regularly, that resistance will eventually subside.
If I am used to paying $1.39 for a plate of eggs in the morning, I will not switch to another restaurant if they go up to $1.49 after a year.
Explain It Or Not?
You can often effectuate small price hikes without having to explain them. But if you do explain them and the explanation seems reasonable you will actually gain some sympathy from your customers. Let your customers know that although you do raise prices, you do so only enough to keep up with rising costs. It makes sense and so long as the competition isnt greatly cheaper, theyll stay with you.
Theres another hidden benefit in gradually raising prices. As it costs more to buy your products/services, your customers will value them more. This is a funny but fundamental principle of consumerism. Over the years, your customers will be able to pay more, and if you continually improve your product/service (by reinvesting some of those price hikes), the perception of your business will improve.
To keep your increases as modest as possible, you need to keep a tight rein on your expenses. Those that have a natural tendency to creep up include payroll, insurance rates, utilities, and supplies.
Brodsky says he has to fight for his increases, but he always insists on raising his prices, at least a little. I intend to do the same in my businesses. You should too.