It’s a brand new year, and now is a perfect time to think about increasing your product or service prices. But are you one of many business owners who are afraid to increase their prices, because you believe you’ll lose their customers?
Well, let me assure you, there’s no need to be concerned if you carry out a well-executed price increase strategy.
The reality is, the risk of losing your valued customers is low, especially if..
- The price increase is reasonable.
- You maintain an exemplary level of service.
Why would customers leave? They know all businesses need to at least keep pace with rising costs.
The important thing to remember is that you can afford to lose some customers and still finish well ahead of where you were. That’s especially the case when your margins are low, as you can see below.
Here’s the calculation to demonstrate the numbers at a few different levels of G.P.
| If your Gross Profit % is… | 20% | ||
|---|---|---|---|
| And you Increase your prices by… | 5% | 10% | 15% |
| Profits are higher until Customer Trade drops more than… | 20% | 33% | 43% |
| If your Gross Profit % is… | 35% | ||
|---|---|---|---|
| And you Increase your prices by… | 5% | 10% | 15% |
| Profits are higher until Customer Trade drops more than… | 13% | 22% | 30% |
| If your Gross Profit % is… | 50% | ||
|---|---|---|---|
| And you Increase your prices by… | 5% | 10% | 15% |
| Profits are higher until Customer Trade drops more than… | 9% | 17% | 23% |
| If your Gross Profit % is… | 65% | ||
|---|---|---|---|
| And you Increase your prices by… | 5% | 10% | 15% |
| Profits are higher until Customer Trade drops more than… | 7% | 13% | 19% |
So if, for example, you’re in a business with a low 20% average G.P and you are considering a 10% price increase, you can afford to lose 33% (1/3) of your customers before your profits go backwards.
That’s a massive drop in customers and highly unlikely to happen unless you’re in an extremely price sensitive market.
My advice is, always do the numbers in your own situation with a clear head. If you trust your solid service offering, more often than not, your customers won’t even flinch at the small price increase.
By Lindsay King