Price is a trade-off between the value you deliver and the perceived cost to the customer. If you raise your prices and nobody complains, you probably did not raise them by enough!
It is easy to be glib. Like our clients, business consultants live in a world where fear of what customers may think is at odds with our acceptance of price increases from our suppliers.
We share four common fears about price hikes.
- Losing customers.
- Bad reviews.
- Competitors don’t raise their prices.
- Losing volume sales.
For example, an eatery owner makes 70 per cent of his sales to customers using a delivery app, which takes a 40 per cent cut of his sales. His gross margin is 10 per cent after VAT and input costs.
The solution is to pass on the delivery cost to the customer. The owner refused, fearing that he would lose customers. His strategy was to sell more, not to make a profit. He did not understand that the profit from the eat-in customers was subsidising the delivery operation. Losing half the delivered sales would make him profitable.
He treats his food as a commodity, sold at a price point. He had lost sight of the value his unique food offered consumers, providing them with a tasty alternative to hamburgers and pizzas.
Bad reviews are a function of a poorly communicated strategy. Today, the input costs for most businesses have risen sharply. Your customers understand this. Tell customers you must increase prices to ensure the quality they have always enjoyed.
The action of competitors needs careful consideration. Likely, many will immediately follow you in raising their prices. However, some may decide to compete on price, absorbing losses for a long time to win market share. Do the math. Remind your customers of what makes your products or services valuable. Even if they leave, they are likely to return.
Losing volume sales involves careful calculation of where your break-even point is. In the case of the eatery owner mentioned above, losing the loss-making takeaway sales would improve his margins and the long-term health of his business.
The advantage of using an outside adviser is they can complement your market knowledge by asking good questions. Raising prices are strategic decisions that need to align with your long-term goals and brand vision.