Avoiding the Profitability Threat of Stagnant Pricing
There are many threats to business profitability and long-term success.
Some of them hide behind numbers that look favorable on the surface. Others are easier to spot but difficult to implement. A third category of threat, however, is one that business owners may recognize but tend to minimize, especially when market conditions or other circumstances make the corrective feel risky or unpalatable: increasing prices.
Business owners are often reluctant to raise prices on existing customers or clients even when their competitors have done so, but a close look at costs can reveal margins shrinking to the point that some accounts are barely profitable or actually costing you money.
This is why an effective financial strategy incorporates price increases to keep up with costs that will otherwise leave you with margins so slim that you become financially vulnerable to even small cost increases.
Here’s a better strategy: put your numbers under the microscope and do some price modeling to see whether your pricing is where it should be – and an experienced accounting advisor can help.
When the Right Strategy Is a Price Increase
One good reason to raise prices: it helps with hiring and retaining knowledgeable, competent and reliable employees. Many employees expect at least a 3-4% raise annually. If you’re not increasing your prices by the same amount, you won’t be able to accommodate them without shrinking profits.
When was the last time you increased the price of your goods and services? Bringing up the concept of price increases, annual or otherwise, might be nerve-wracking but chances are your competition has already done so. If you want a qualified team of employees, you just can’t avoid the issue of annual raises.
If it’s not possible to keep your raises competitive, you may need to look at fewer or less experienced/less expensive employees, which is often your #1 cost but this is risky considering how difficult it can be to find the right people.
Consider Your Options & Provide Your Customers with the Same Opportunity
If you’re not sure about raise prices, cost-projection modeling can help identify other strategies for protecting against shrinking profits.
You can do a similar bit of modeling for your customers by including options with the advent of a price increase:
- What services/goods they can receive at the original price?
- What added value might be available with new pricing?
- What can they expect at a price that’s midway between the old and new pricing?
And instead of worrying about what clients may think of price increases, with proper communication, you may be surprised at how little pushback you get from your clients, who may be facing the same choices themselves.
Understand Your Profitability
To know whether you need to increase prices and by how much requires an understanding of your profitability.