March 2008

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Raising prices is a balancing act

March, 2008

As climbing energy costs continue to erode the profit margins of many small businesses, owners are again considering whether they should raise prices. But as Hamlet would say, "Ah, there's the rub." If you raise prices, you risk losing clients to competitors. If you don't, rising costs can capsize your company.

Where to start

Raising (and, sometimes, even lowering) prices can be a balancing act. Where do you start? As with any major business decision, pricing should take into account a variety of factors. First, you need to carefully analyze the costs needed to bring your products or services to market. Such expenses might include raw materials, storage, personnel, advertising, delivery, rent, equipment, taxes, insurance, and the list goes on. Failure to cover all these costs in your price will lead — inevitably — to shrinking profits.

The art of pricing

Next, it's important to establish an acceptable profit margin. This is where the art of pricing begins. You can research competitors in your region to determine their pricing for comparable products; you can raise your finger to the wind to discern the business climate; you can even ask your customers about their preferences. But in the end, determining the best price will be an educated guess. Fortunately, it won't take long to discover whether the guess was a good one. Your customers will inform you. They'll either continue to buy your product or seek out a competitor.

Remember that it's generally easier to lower prices than to raise them. Consumers who cheer when you lower prices by 10% might turn to a competitor if you raise prices by the same percentage. Also, small incremental price increases tend to be more palatable to customers than a few large changes. We see this every day in the rising cost of gasoline, utilities, and taxes. Incremental inflation we can handle; just don't stick us with a huge bill all at once.

"Overall, when considering pricing it's important to take a long hard look at both your costs and the quality of your products and services. Generally, customers will pay a premium for goods and services that provide — in their perception — greater value. Successful business owners endeavor to increase both the actual quality of their products and the perception of that quality in the minds of customers. Do both well, and a price increase may be in order."

Lelony Bergerin

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