Consultant’s Corner: Planning a Price Increase
Question: I’d like to re-evaluate my pricing schedule, but I am not sure how much to increase my prices. Where can I get a start on understanding the pricing game?
Competitive prices are critical in order to maintain customers and market share; however, you still need to maintain adequate profit margins and profitability. We do not know how long it may have been since you last increased your prices; however, businesses must continually monitor their profit margins and operating costs in order to determine when price increases are necessary to cover increases in labor, raw materials, and other operating expenses. For example, your current prices may have resulted in a reasonable profit margin in the past but are now too low due to cost increases since those prices were established.
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Pricing: Mistakes, Models, and Psychology
The first place to start assessing possible price increases is to analyze your gross profit margins and determine where you are losing money or realizing low profit margins. Also, you can review your historical records as to your last price increases and determine what labor, raw materials, and other operating cost increases you have experienced since those dates. Once you have recalculated your standard or target prices, you can review the prices of your local competition to determine what price adjustments you may need to make in order to be competitive.
Generally, the prices of your local competition, your particular operating cost structure, how much profit or income you desire, and other factors will affect your prices. A “fair price” in our opinion is one that is acceptable to both buyer and seller – a price your target clients perceive as affordable for the services you provide and still allows you to meet your profit or income targets. Performing competitive research among your local competitors is often required to get some idea of what others in your local market are charging and determine whether your target clients might consider your prices affordable. But setting your fees to attain your profit or income goals while keeping them affordable can be a delicate balancing act. To help assess your current pricing and update your prices and overall strategy, you can review articles and discussions on pricing formulas and strategies at websites like the following: