During the disruption of the last two years, many business owners have avoided increasing prices. Even now, as costs go up all over the place, many remain hesitant or simply haven’t yet had a chance to review their pricing.
No matter what line of business you’re in, raising prices at some stage is inevitable. Here, we look at the key considerations for business owners reviewing pricing and how to approach it without damaging client relationships or sales revenue.
With all of the recent news headlines around cost of living, inflation and higher interest rates, it’s easy to become overwhelmed by the issue of pricing. While many businesses are facing similar challenges at the moment, pricing remains an incredibly varied issue across different industries. What will be appropriate in the retail sector, for example, is very different to the complex matters facing the building and construction industry.
Rather than let the external noise over-complicate things, our advice is to keep things as simple as possible. And the simple fact is, if you haven’t looked at pricing during Covid – or you’re feeling the pinch from supplier price hikes – now is the time to review your options.
Increase your prices without deterring clients
Reviewing your pricing gives you the opportunity to consider what your business does best and charge appropriately to meet the market. We often observe that when businesses struggle with pricing, it’s because they are trying to be too many things to too many people.
In our experience, when businesses are clear on the problems they solve for their ideal clients, those clients are happy to pay for the value they receive. While the business may risk losing a portion of clients in the short term, it is often the case that those clients are soon replaced by new, higher-value clients.
If you decide to increase your prices, it should be part of a broader approach that considers all facets of the business and aims to maintain long-term value and profitability. This could include minimising the amount of inventory held, looking for more favourable payment terms from suppliers, adopting pricing strategies like product bundling, or expanding to include new services or products.
Simply passing on all of your rising costs to customers is unlikely to be received well. If you’ve avoided price increases for several years, a big jump now is likely to turn clients off, particularly if it’s not communicated well prior to making changes – which brings us to our next point…
Communication is key
Any change to your pricing needs to be communicated well to your customers and any other stakeholders, including employees and suppliers. The value of good communication when it comes to price increases can’t be overstated. If executed properly and well in advance, the right communication plan can even enhance sales.
Next steps…
If you have not paid specific attention to your pricing over the last two years, we recommend taking the following steps:
- Take some time to review your business’ direct costs. This will allow you to identify your gross profit, i.e. the amount of money you have left after accounting for cost of sales.
- If you find your gross profit is trending downward, it’s time to consider your options. While you can and should work on efficiencies to keep your costs down, increasing your prices is an appropriate measure on the other side of the equation.
Professional services and other businesses with long-term clients or repeat customers should also try the following:
- List your clients in order of profitability, top to bottom. This exercise alone will open your eyes if you have never done it.
- Look at the bottom 20% of your clients (as determined by gross margin). Determine how much gross profit (total dollars) that represents for your company. Chances are, it is not as large as you thought. Consider the impact on your business if you were to lose revenue from this segment of your clients.
- Consider also how you can add value for your top 20% clients. Are there services you provide that they are not yet aware of?
Adjusting prices will have an effect on the entire business, including budgeting, cash flow, progress payments and your capability for winning new work. Good financial management should include an annual review of pricing and whether you decided to increase or even decrease, our advice is to take the emotion out of the decision-making process and avoid putting it off any longer.
If you need assistance working out the best strategy for your business and the practical steps to implement change, your next step should be to discuss your options with us as your accountant and business adviser. We work with ambitious and successful business leaders every day, and can offer the sounding board advice needed to help the business reach the next level.
If you need advice about this or any of the other topics we write about, please do not hesitate to call us on (07) 5438 8088 or email mail@corebusiness.com.au.
Core Business Accountants specialise in business advice for growing and mature family-owned and small and medium-sized businesses.