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Financial

Is Now the Time to Raise Prices? Why, When, and How to Do This
December 1, 2010

Your health insurance premiums are going up substantially in 2011. The price of gasoline at the pump is also up. Your supplier has raised its prices. You're feeling the pinch. Should you raise your prices now?

Why raise prices?
In the fall, Starbucks announced that it was raising prices on certain drinks. The price hike was in response to the fact that coffee prices hit a 13-year high on the commodities market.

Businesses should closely monitor their key financial data, including their profit margins. As Starbucks demonstrates, when expenses rise, this clearly eats into the profit margin and it may be time to raise prices.

When to raise prices
Is now a good time? During the economic downturn, many companies cut their prices or held steady; some business owners still believe that their market does not allow them to raise prices at this time.

If, however, you believe that things have leveled off and you won't discourage customers by raising prices, now may be a good time to do so. The beginning of the year is often a time for a price increase by service-based businesses. Of course, check to see what your competitors are doing with their prices at this time.

Consider selective price increases (per the Starbucks model). Instead of across-the-board price hikes, only increase certain items or services.

Idea: For service-based businesses, consider retaining (at least for a while) your current prices for existing customers while increasing them for new customers or clients.

How much to raise prices
Clearly the marketplace helps to set the price of goods and services. However, it is helpful for you to understand the concept of price elasticity. Figure whether an increase in prices will impact demand and, if so, to what extent.

Resources

  • Business.com has tips and tactics for raising prices without losing customers.
  • NFIB has a series of articles to help small businesses with pricing (search their business resources section).

 


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