It’s common for small business owners to struggle with one of the most important aspects of success–pricing your products and services correctly. That’s because for many entrepreneurs, achieving balanced pricing–the sweet spot in which your prices are competitive while still enabling you to earn a profit–can be about more than simply math. Often, it also involves the relationships you’ve built and your desire to keep your customers happy.
In this overview, learn when and how to change your pricing and how to present changes in ways that help build client loyalty.
Signs that it’s time to review your prices
Many businesses experience increased costs but hesitate to adjust their prices, choosing instead to operate with slim margins in the belief that some revenue is better than no revenue. In truth, every small business reaches a point when the pricing strategy needs careful review. Here are key indicators that it’s time to reassess your pricing strategy:
Eroding profits
Maybe you’ve been in business a couple of years and haven’t increased prices because you fear losing customers. Perhaps you’ve added products and services but haven’t analyzed their profitability. Or maybe your business has been impacted by inflation, rising wages and benefit costs, or rent increases. The real challenge isn’t just that costs are rising–it’s that the decreased profitability impacts your ability to sustain your business and grow.
Customer feedback
Customer feedback can be a valuable indicator of whether your pricing is on target. If, for example, they often tell you that your goods or services “are a bargain,” then it may be time to increase your prices.
Changes in competitor pricing
You don’t necessarily want to match your competitors’ prices, but having a thorough understanding of the market helps you position your offerings more competitively.
Lost or declining sales
If you are noting fewer customers or sales, pricing may be a factor. This is particularly true if customers say your prices are high compared to competitors and they aren’t buying from you for other reasons, such as quality or convenience.
Demand outpaces supply
Sometimes, high demand for your goods or services isn’t always a positive sign–it could indicate that your prices are too low. You may be able to grow profits by providing higher-quality products or services to a smaller group of customers at a higher price point.
Know your numbers: Analyze your pricing strategy
In a handful of steps, you can analyze your pricing strategy and ensure that your business builds financial strength and profitability while keeping customers happy.
- Find your break-even point: As your expenses change, your business’s break-even point will, too. If you’ve never calculated yours or haven’t updated it in a while, do so now so that you know the minimum amount of revenue you need to cover your costs.
- Calculate profit margins for each product or service line: To maintain a viable business and grow, you need to know how much money you’re making on each sale of a product or service. This enables you to optimize offerings that are profitable while reducing or eliminating those that are underperforming.
- Analyze competitor pricing: You should either be within a reasonable ballpark or able to demonstrate increased value to your customers to offset higher prices.
- Raise your prices, as needed.
Implementing price changes without losing customers
Raising your prices can feel daunting because of perceptions that your customers may respond negatively. Most people understand that businesses need to adapt to changing economic conditions. The key to raising prices and retaining your customers is good communication. Here are three steps to help:
Offer personalized communication for existing customers
Depending on which communication channel is best for your business, such as email or a phone call, reach out to customers to explain price changes. Be transparent about why prices are increasing and how that benefits your customers–you’re sticking with higher-cost products because the quality is much better or you’ve raised your team’s wages, for example. If a customer voices concern, have an honest conversation with the goal of leaving the customer feeling valued and understood.
Update all pricing channels consistently
Be sure your website, social media, and onsite outlets reflect the new pricing. Being consistent and thorough minimizes surprises and builds trust in your business and brand.
Proactively help customers who may be negatively impacted
If your pricing analysis results in the decision to eliminate certain products or services, let your customers know in advance. If they’ve come to rely on your business for these, give them time to find other suppliers and even connect them to other businesses. This helps to alleviate concern and builds goodwill.
Real-world example: Limiting offerings, raising prices
After an analysis of services, prices, and profitability, a local auto-repair shop decided to focus only on those services that were most valuable to customers and profitable for the shop: oil changes, brake service, and tires. Although it meant that his shop was no longer a one-stop auto-repair facility, by focusing on a few key services, the shop’s team increased efficiency and quality, which provided additional value to their customers.
The owner communicated the changes in advance to his customers and, as a result, he created a balanced pricing strategy in which customers are happy and the shop operates at a profit.
Grow America can help strengthen your business’s financial foundation
Pricing strategy is about finding a balance that keeps your customers happy while supporting your business’s long-term stability and growth. The onset of the New Year is a great time to tackle this, but it can be done anytime the signs point to a need for a pricing-strategy review.
If you need financing to achieve your profitability goals, submit an application inquiry today. For more than 30 years, we’ve been lending to small businesses to help borrowers build equity, create jobs, and strengthen their communities from within.