Often clients ask me “Are my price points correct? Should I put my prices up? Or down? There is no black and white answer, as every business is different, their products are different and their market is different! But understanding a bit more about pricing can help with the decision.
Price vs volume
The first thing to understand is that there is usually a reverse relationship between price and volume- if you put your price up, you can probably expect your volume will fall, and if you decrease your price, your volume should increase. This also applies to services.
Let the reason drive your decision
So, what is your intent behind changing your price? If you are selling products, do you have plenty of stock, and so you want to sell more products? (you don’t want to drop prices, and get an increase in demand if you don’t have enough stock!). Or if you are selling services, do you have heaps of customers and not enough time to service them? Or are you just wanting to make more money, and trying to find that sweet spot where you can maximize profit?
Understand your price elasticity
The next thing to understand is price elasticity, which means how sensitive your market is to changes in price for your product. This means “how much can you put your prices up/down before people will stop/start purchasing”. Where do you sit in the market in terms of price and competition? If you are offering a unique and premium product or service, it is likely that your market will be more “open” to increases in price. If you are selling a commoditised product (such as bread), where there is heavy competition, your market may be a lot less likely to absorb a price increase. The strength of your brand will also come into play. For example, even though there are plenty of thongs in the market, Haviana is a market leader, so people will gladly pay more to have “the name”.
Develop your strategy
Once you have decided whether to put your prices up or down (depending on your purpose and your market), the most important part of this process is the strategy you employ- do you do a one-off price increase or do you take a stepped/ phased approach? It will be dependent on your market and how much potential lost sales you are able to risk if your customers cannot absorb new prices. The old ‘Risk/ Reward’ balance! I would strongly suggest that you create a financial model, like a Sales/ Volume variance and play around with different scenarios to understand what the impact could be on your bottom line.
Communicating the change
Next thing is to create the messaging you use to communicate the price change to customers. Chose a message that is honest, and concisely communicates the reason behind the price change. This does not need to be publicly communicated, but is good to have a clear message when customers enquire and to share with your staff i.e “Due to large increases in our sales in the last 6 months, we have been able to negotiate better prices on our product cost, and as a result, we are very excited to be able to pass that through to you, our customer”.
So regardless of whether you choose to increase or decrease your prices, a good strategy for changing your prices:
- Know your reason for wanting to change prices and make sure your decision supports this
- Check how sensitive is your market to price changes (price elasticity)
- Develop your strategy (including a Plan B if it doesn’t work!)
- Know how you will communicate the price changes to the market
- Track results and monitor very closely after a price increase
- Tweak or reverse if necessary
Changing prices is not an easy exercise, however when executed thoughtfully, has potential to greatly improve the profitability of your business.