Raising your selling prices will increase sales when your product or service has an inelastic demand curve, i.e. when you raise prices and there is minimal or no change in volume sold. This is a profitable strategy when higher prices produce greater gross profits due to increased profit per unit, even if volume has fallen.
Additional benefits of increasing prices include:
- Raising your prices can move you to a more upmarket clientele.
- Allows you to distinguish yourself from your competition.
- Increases the perception of quality so can actually lead to increased sales volumes (in some cases).
- Eliminates low quality price sensitive customers.
- Allows you to sustain your desired profit margins.
- Price increases may position your product or service as a ‘premium product’.
Before you go all out with your price raise you’ll need to do a little bit of homework to determine if this is the right strategy for your business right now.
- Determine whether your product or service has an inelastic demand curve – there is no point increasing your selling prices if it results in a substantial decrease in volume sold.
- Find out what your competitors are offering and their current pricing.
- Determine your objective in increasing prices – i.e. to increase sales, increase gross profits, increase the perception of quality, etc.
- Calculate the financial affect of higher prices and lower volumes on your gross profit and net profit.
- Increasing selling prices often requires the business to increase their service levels at the same time.
- Consider the affect of increasing prices on business reputation, brand quality, and credibility.
- Limit the initial selling price increase to 10%, and monitor the affect on sales, gross profits, and net profit.
If you don’t know your critical business numbers like net profit margin and breakeven point it’s well worth figuring that out so you can make solid decisions on whether you’ve got the right pricing structure. Contact us for a FREE Financial Health Check to get more clarity.
Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.