It's tricky knowing whether to explore a price increase or decrease across your products / services, as the implications of doing so are hard to foresee. In this post, Clare Wood, a business coach, teaches you the 4 key things you need to know when considering a price change.
Often clients ask me “Are my price points correct? Should I put my prices up? Or down?”
There is no black and white answer, as every business is different, their products are different and their market is different! But understanding a bit more about pricing can help with the decision.
There are 4 key things to understand...
Number 1: The reverse relationship between pricing & volume
The first thing I want you to understand is that there’s usually a reverse relationship between price and volume of sales: if you increase your price, you can probably expect your volume of sales to fall, and conversely, if you decrease your price, your volume of sales should increase. This also applies to services.
So, what is your reason for wanting to change your price? If you are selling products, do you have plenty of stock, and so you want to sell more products? (this in mind, you certainly wouldn’t want to drop prices, and get an increase in demand if you don’t have enough stock!). Or if you are selling services, do you have heaps of customers and not enough time to service them? Or are you just wanting to make more money, and trying to find that sweet spot where you can maximize profit?
Number 2: Price elasticity
Secondly, let’s talk about price elasticity, which is about how sensitive your market is to changes in price for your product. This means ‘how much can you put your prices up/ down before people will stop/start purchasing’.
Where do you sit in the market in terms of price and competition?
If you’re offering a unique and premium product or service, it’s likely that your market will be more “open” to increases in price.
However, if you’re selling a commoditised product (such as bread), where there is heavy competition, your market may be a lot less likely to absorb a price increase.
The strength of your brand will also come into play here. For example, even though there are plenty of thongs in the market, Havaiana is a market leader, so people will gladly pay more to have “the name”.
Number 3: Your pricing strategy
Once you have decided whether to put your prices up or down (depending on your purpose and your market), the most important part of this process is the strategy you employ…
So, do you do a one-off price increase or do you take a stepped/ phased approach?
It will be dependent on your market and how much potential lost sales you are able to risk if your customers cannot absorb new prices. The old ‘Risk/ Reward’ balance! I would strongly suggest that you create a financial model, like a Sales/ Volume variance and play around with different scenarios to understand what the impact could be on your bottom line.
Number 4: Your messaging
Next thing is to create the messaging you use to communicate the price change to customers.
Choose a message that is honest, and that concisely communicates the reason behind the price change. This does not need to be publicly communicated, but it is a good idea to have a clear and consistent message on hand for you and your staff to communicate when customers enquire.
i.e. Due to large increases in our sales in the last 6 months, we have been able to negotiate better prices on our product cost, and as a result, we are very excited to be able to pass that through to you, our customer.
So regardless of whether you choose to increase or decrease your prices, a good strategy for changing your prices:
- Know your reason for wanting to change prices and make sure your decision supports this
- Check how sensitive your market is to price changes (price elasticity)
- Develop your strategy (including a Plan B if it doesn’t work!)
- Know how you will communicate the price changes to the market
- Track results and monitor very closely after a price increase
- Tweak or reverse if necessary
Changing prices is not an easy exercise, however when executed thoughtfully, it has the potential to greatly improve the profitability of your business.
About the Author
Clare Wood is a business coach who loves one-on-one coaching with women (and has a particular interest in working with mums). She is CPA qualified (from a finance background), so she loves spreadsheets, strategies and helping her clients to achieve financial success in their small businesses.
LinkedIn: Clare Wood