When to Raise Prices
Raising prices is one of the most important financial maneuvers for enhancing your business’ financial performance. In fact, studies show that a 1% improvement in price leads, on average, to an 11% increase in profits. Is knowing when to raise price, and by how much, more art or science? The answer, you’ll see, is in the data.
Your Competitors Have Been Purchased
Many times when a company has been purchased, the acquirer needs to maintain or increase pricing and cut costs in order to ensure a return on their investment; this remains true even when the acquirer has the deepest of war chests. Furthermore, these transitions can often lead to turmoil for the customer base of the acquired customer, with many of the customers seeking more attentive solutions. This can present a great opportunity to acquire dissatisfied customers that are willing to spend more than they have already been spending. Tracking and understanding how and why customers are responding to the acquisition is critical to responding to and timing this opportunity. Knowing how much you can raise prices is a matter of the price being paid and the degree of dissatisfaction.
Your Market Share is Increasing
Generally your prices are going to be optimized for acquiring market share or fattening profit margin. If your market share is increasing beyond an optimal threshold, it’s a good indicator that it’s time to raise prices. To keep an eye on this, of course, you need to have a sense of what your market share is for your niche. We’ll put out another article soon about techniques (and shortcuts) for monitoring market share and external market dynamics soon (check back here for a link). Your optimal market share is a number you can calculate, and is also the result of strategic decisions you must make about your pricing, and your goals for the company. If your goal is to optimize profit, your optimal market share figure will be much lower than if your goal is to drive all your competitors to the hills.
Your Margins are Shrinking
Sometimes calls to increase prices are not driven by opportunity; they’re driven by need. When you see margins shrinking it may be an indicator that you need to raise prices. It’s often prudent to avoid winning a price war and keep your prices high, though we acknowledge it’s not always the best course of action, and sometimes not even the most profitable course!
Your Costs Are Increasing
It’s almost too obvious to list here. It’s inevitable that your costs will rise over time. And your customers know this, you know it, and whenever possible you’ve worked preparations to manage certain cost increases into your contracts. An important thing to consider, however: if you’re still trapped into a cost-base price model, there’s no time like the present to consider data-driven alternatives that optimize your pricing.
The Customer Wants Additional Services or Features
Many customers have a laundry list of extras that they require, or seem to require. Generally, offering these on an a-la-carte basis and charging for them is a great way to increase your pricing and ensure that customers are selecting only the things about your services that they value most. Think of anything you bundle in, and think of ways you can strip that out and charge for it to either increase your revenue, or decrease your costs!
You have Expensive, Time Consuming, or Problem Customers
When customers consume more resources than planned, it may be time to part with the customer or charge them what it’s worth for you to serve them. That might look like too much time with customer support, paying too late, etc – you know the details. Identifying this type of customer and taking action can lead to more profitability and/or less headaches, so it’s usually worth it! A good tool for assessing when this is called for is knowing your LCV (lifetime customer value) and comparing that to the figures for your actual customers. Of course, you’ll need to have the underlying data of what it’s costing you to support each customer individually to make this analysis properly.
Your Competitors Are Doing a Bad Job
When your competitors are doing a bad job, their customers are probably dissatisfied and may be looking for alternatives. This isn’t a time to tempt them over to you with promises of savings and service – it’s time to take position of a premium position for quality service. How do you know if your competitors are doing a bad job, how bad, and how does that inform how much you can charge?
Your Competitors Aren’t Growing
Competitors may not grow for many reasons: the market may be tapped out, they may not have the resources to grow, they may have supply chain or operational restraints, their attrition may be keeping them level with any growth, etc. Just about any reason for your competitors to not be growing is a good reason for you to raise your prices.
Customer Satisfaction is Off the Charts!
When your customers are incredibly satisfied, it’s a good time to increase prices modestly to your existing customers and more aggressively for your new sales.
When the Economy Is Raging
Generally when the economy is on an upswing, people aren’t in a cost-saving mode and make purchases with a bit less scrutiny; and that holds true for your services as well. When you hear key economic indicators are doing great, that’s a good sign that you can experiment with raising prices.
Perceived Value is High
You want your customers to believe they get great value from your service, and, if the value is too great you may be leaving cash on the table. Track perceive value, quantify it, aim for your target value.
When Your Capacity Is Low
Those macro notions of supply-and-demand apply in your context, too. When supply is low, prices go higher. Consider charging more for customers that sign up when you’re reaching your limits.
Your Win Rate is Sky High
If you are winning every deal, chances are you are priced too low and can benefit from raising prices and boosting margin. This, of course, depends on your strategy. If you’re going low-price to steal market share at a fire-sale, stay on course. If you’re looking to optimize margin, a very high win-rate is a good sign you’re not pricing high enough.
You Haven’t Raised Prices Yet
If you haven’t raised prices in 5 years or a decade, it’s time. Price calibration should be done yearly at a minimum. Get the right data to alleviate fears about how the market will react, and go into price setting informed and empowered.