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When did you last raise your prices?
07 March 2011
So when did you last put your prices up? When I asked this question to a couple of businesses a few months back one of them, a restaurant, said they thought they had last raised prices \"about 3 years ago\" and the other, a cleaning business, said \"not in the last 10 years\".
Not in the last 10 years? Is it possible for a business to survive without ever putting up prices? Well the cleaning business had in fact raised their prices for new customers but had never \"had the guts\" (their words, not mine) to raise prices for existing customers. And the restaurant business, well they said they had intended to raise prices but \"hadn't quite got round to it\".
A three-year price rise procrastination is not unusual because we loathe putting up prices. I blame it on our hazy recall of economics 101 and in particular the price elasticity of demand - a concept we remember simply as \"if prices go up, demand goes down\". Not surprisingly this little bit of knowledge gives us price paralysis; we daren't raise our prices incase all our customers leave.
But in practice do we need to be so worried about it?
Three months ago I suggested to the restaurant business and the cleaning business that they made a very simple and not-too-bold adjustment to their prices. Both businesses put their charges up by a very unscientific 10% across the board. Last week we looked at the results.
In the three months the restaurant business had a like for like increase in net profit of 50% over the same period for the prior year. The revenue generated by the increase in prices went straight to the bottom line. Not a single customer appeared to notice the price hike and there was absolutely no decrease in volume.
The cleaning business did even better. They generated a like for like increase in net profit of 150%. - and they needed every dollar of it. Over the years the net profit of the cleaning business had got skinnier and skinnier as they had failed to pass on their increasing costs to customers.
I asked the boss of the cleaning business how her customers had reacted when she told them that she was raising prices. \"One of them laughed,\" she said \"and told me that I was still great value and the rest, they just said they were fine with it. No-one left\"
Setting prices can be a complicated process and there is much to think about. But if that is holding you back from raising prices try the simple approach instead. Small annual price rises are usually easy for customers to stomach, simple to action and can make a significant impact to your bottom line.