Many business owners struggle with the idea of raising prices. Even in the current environment of high inflation and rapidly increasing costs for just about everything, many people struggle to raise prices. Sometimes it's in fear of losing good business, sometimes it's because raising prices feels like conflict and owners are conflict-avoidan. Other times it is because people have deep seated insecurities and low self-confidence, and feel like they simply aren't worth the extra fee. Regardless of the reason, raising prices regularly, to keep pace with the costs of running the business as well as remain competitive, is crucial to a business' long-term survival.
As Mitchell explains, the Pareto principle applies to customers and profits too: 80% of your profit comes from 20% of your customers. When you neglect to raise prices, the "bad" customers, that is, the low margin customers who cost a lot to service (in time, stress, and maybe even physical materials) and demand the lowest rates, become worse customers. Then the good customers -- your most profitable customers -- become bad customers, because you are continuing to charge them the same rates while your costs increase!
Raising prices regularly accomplishes several things for the business:
- It allows the business to pass on increased operating costs (due to inflation), so your profit margins remain stable
- Some customers will stop buying your products and services due to the price increase. These were your least profitable ("bad") customers anyway, so they need to go to make room for you to service better customers. You end up doing less work and making the same amount of money when you let these people go.
- Good customers stay good (profitable) customers. They are the most likely to agree to the price increases anyway, because they are likely not buying based on price.
- You train customers to expect regular price increases by regularly increasing your prices!
In a high inflationary environment, raising your prices in step with your costs may be the difference between making it or going bust. If you haven't raised your rates in a while, now is the time!
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Mitchell Baldridge
Twitter: @baldridgecpa
https://baldridgecpa.ck.page
https://baldridgefinancial.com
Scott Hambrick
Twitter: @hambrickscott
IG: @ogscotthambrick
https://onlinegreatbooks.com
https://scotthambrick.com
