When To Raise Prices

I’m often asked “When is the best time to raise prices?” Almost any time is a good time to raise prices…unless you’re raising them every few months. Frequent price increases tend to irritate customers. With that caveat, here are three times when raising prices can dramatically improve your business.

1. At capacity

When you’re nearing capacity, instead of expanding your infrastructure, raise your prices. You may lose some of your most price-conscious customers, but that will open capacity for you to replace them with customers who place greater value on what you offer.

At the same time, your price increase will typically more than offset the loss of price-conscious customers…who, by the way, were creating havoc and adding cost to your operation.

2. Dissuade

When you’re facing a prospect that you don’t want as a customer, someone whom you know will be a PPP (persistent posterior pain), dramatically increase the price you quote. More often than not, they’ll go away without you having to say no to them. Here’s an example to illustrate my point.

A prospect told me that he’d been given the names of three consultants by his bank. He said that since I was just down the street from him and he preferred to work with local businesses, he wasn’t going to contact the other two.

When I asked him what he wanted to accomplish, he said he didn’t know. At this point, I knew several things about this prospect. One, he was in financial trouble otherwise his bank would not have been suggesting that he get help from a consultant.

Two, he was trying to appease the bank. He really didn’t want help, but felt compelled to ask for help to assuage the bank’s fears.

Three, he wasn’t likely to do anything with the advice he got because he really wasn’t seeking help.

At this point I suggested a business assessment, which he readily agreed was a good idea. Then he asked how long it would take. I responded “One day.” He asked what it would cost.

I responded “$7,000.” He said “I don’t have my calendar with me. Let me get it and I’ll call you back.” I never got a call…which was my goal in quoting $7,000 for one day’s work.

3. Annually

Every business should raise it’s price 3% to 5% annually. Here’s the thought process that buyers go through when faced with a small increase:

Should I shop this increase? I’d have to find other vendors, interview them, check references knowing that I’d only get good ones, check online reviews, deal with the inevitable headaches associated with a transition, and hope that I end up with the same quality and service I’ve been enjoying.

This thought process, which occurs more subconsciously than consciously, usually results in a conclusion that it’s cheaper to pay the increase than to find an alternative.

Contrast that with double-digit increase necessitated because you didn’t raise prices annually. Your customer will shop the double-digit, or near double-digit increase, because the potential savings makes the work required to find alternatives worthwhile.

There’s an even more compelling reason for annual 3% to 5% price increases: in most years, you’ll outpace inflation. Historically, in the U.S., inflation runs around 2%. With a 3% to 5% increase, you are gaining real purchasing power increases in most years. That’s a huge windfall for your business.

Takeaways

Pricing has a lot of uses…many of which improve your bottom line and make doing business a lot more enjoyable. In particular, using pricing:

1. When you are at, or near, capacity helps you avoid needlessly adding infrastructure.
2. To dissuade unwanted customers is easier than having to explain why you don’t want their business.
3. Annually to minimize price resistance and outpace inflation.

If you enjoyed this insight, please share it with friends and colleagues. They’ll appreciate that you’re thinking of them.

Resources

For a complete overview of Greater Profit/Fewer Sales concepts, check out Dale’s books, Pricing for Profit and Generate Greater Profit With Fewer Sales:

Even More Profitable training programs assure that your organization enjoys the benefits of being a Greater Profit/Fewer Sales organization.