Key Business Skill: Raising or lowering prices
There will be times when you need to change your prices. This can be a very difficult thing to do, because in a competitive market, some prices are extremely sensitive.
Sometimes as little as a penny or a dime can change the volume you sell dramatically, if it juxtaposes your product with a competitive one in terms of price.
But if you are facing rises in cost of raw materials, labour or transportation, you may have little or no option but to increase the price. First carefully check current costings, and see if there are savings to be made.
But before you consider increasing or reducing prices, carefully analyse the impact on your profitability of the proposed price change.
There are two questions you should consider:
What effect will the price change have on the sales volume?
What effect will the price change have on the profit per sale?
Bear in mind that increasing prices may improve your profitability even if your sales volume does drop. You need to quantify the figures you need to achieve to retain profitability.
If you are increasing your prices, you might choose to explain to your customers why it is necessary. This is particularly helpful if you still priced below competition. In this case use the price change as an opportunity to re-emphasise the benefits your product or service offers to them. A good explanation, showing the increase is fair, may also strengthen your relationship with customers.
Reducing prices can also back-fire, because low prices can be indicative of poor-quality. Sometimes customers do not select the cheapest product on offer, as they are concerned quality will not be good enough. Is this the image you want to create for your products?
Look for ways to build profits by another route to avoid cutting prices to build up sales. In many cases, ‘ decision to buy from you relate to the benefits you offer, as much as your price. It is rare for the decision to be made based solely on the price.
Some products have a higher price sensitivity than others, so approach pricing changes with caution.
Quick Facts: raising or lowering prices
Try to avoid price increases by
- carefully checking current costings
- review overheads and contribution
- See if there are savings in costs which can be effected, such as renegotiation of raw materials, process change, specification change, and packaging change.
Try to avoid price reductions by
- Using other tactics to increase sales
- Trial a reduced price
- Offer something extra
Look for ways to mask price increases by
- Introducing a new, higher-priced product or service and at the same time making the older, cheaper one obsolete.
- Lowering the specification, and your costs, while maintaining the same price
- Reducing pack size
But be aware that masking price increases can produce an adverse reaction from customers if they realise what has happened.