You’ve worked hard to build your business into what it is today. Nice job! But if you’re like a lot of other business owners, you may find inflation and climbing operating costs can put a big dent in your bottom line. What to do?
You might want to consider a strategic rate increase to jump-start a dwindling revenue stream. Here are some confidence-boosting guidelines to keep in mind.
Strategies for Dealing with Inflation
When it comes to setting fees, consider the economy, and research what your competitors charge. “Price your work in terms of the value that you’re providing for customers,” says Janet Attard, founder and CEO of Business Know-How and author of “The Home Office and Small Business Answer Book.”
While there’s no single formula for determining how much your customers will be willing to pay, Attard offers the following four scenarios in which raising your prices could give your business a boost.
Scenario 1: You’re not keeping up with inflation.
If it costs you more to provide a product or a service than it used to, then you’re losing money if you don’t raise rates accordingly. Even if your costs have stayed the same, you can increase your business’s margin with a small price hike. For example, a leading bagel shop that draws 1,000 customers daily and charges $1 per bagel can earn significantly more revenue simply by raising the price of each bagel by five cents. “You could bring in just a little over $18,000 a year extra, on that one item,” Attard says.
Scenario 2: Your business is at or overcapacity.
Sole proprietors, consultants and service providers should consider raising their prices when the number of hours they work exceeds what they need to be profitable. Let’s say you’re a web developer who charges $80 per hour and is constantly booked. You might try raising your rates to $125 per hour. While some clients might drop off, you’ll gain time to focus on more lucrative jobs, Attard says.
Scenario 3: Your business is in high demand.
If customers are clamoring for your product or service, they’ll be more receptive to a price hike. For instance, a hair salon can raise prices for its most popular hairdressers because customers will pay more for the value they place on services from these elite stylists. Likewise, if your business is the only one that provides a service or product, customers will pay more for the privilege of doing business with you.
Scenario 4: Your business is shifting focus.
Some companies decide that they want to go after more affluent customers or scale back on certain aspects of their business. One way to achieve both of those goals is to raise prices gradually so you make fewer sales but bring in more revenue. For example, an established, in-demand consulting firm owner who is nearing retirement has the flexibility to cut back on clients by slowly raising prices each year — as long as the business has a substantial and secure customer base.
The decision to raise your prices can be tough. But by considering the economy, researching competitors’ rates and measuring the value you bring to your customers, you can come up with a price that’s a win-win for all.