What if I increase my prices by 5%?

INCREASING YOUR PRICES

All businesses will have, at some point in their life, set prices for the products or services that their business offers to their customers. These prices may have been set using rigorous scientific method, such as with the Generate capacity calculator, or they may have been set based on cost plus a margin, or they may simply be based on industry standards.

What many businesses then fail to do is adjust their prices over time in line with market changes, changes in costs, etc. This then begs the question, what if you raised prices by a small amount? What would happen to your business if you raised your prices by 5%?

First up, you’re going to want to consider the impact this will have upon your existing clients. Will there be push-back on the increase? Will they even notice? Generally speaking, if you’re doing a great job for you clients and if you explain clearly the need for the small increase in prices, you’ll find that the vast majority of your customer base will be okay with the increase.

Next, what about your ability to attract new clients who aren’t yet aware of your brilliance? Well, you’ll need to ensure that your prices are within market ranges. Look around at what your competitors – both large and small – are charging and ensure you can justify your position in the marketplace.

Okay, so you’re ready to roll out the new prices. Before you make any change it is wise to map out what effect the change will have upon your business – ask yourself what you can expect the price increase to actually deliver for your business. This is where scenario analysis and forecasting comes into play. Basically this is creating a budget for the coming period, say a year, based on your prior year and then overlaying a new scenario – in this case an increase in prices by 5%.

As an example, a creative agency earning $600,000 a year in revenues has $450,000 in wages plus another $100,000 in overheads leaving it with $50,000 in profits before tax. If this business was to increase prices by just 5% – something very simple to do – it would increase revenues by $30,000 with no matching increase in costs which will mean profit before tax jumps from $50,000 to $80,000 just like that.

Obviously that’s an overly simplistic example (and one involving an agency getting a poor return on wage investment!), but it illustrates the point that a tiny change can make a significant impact on the profits of the business. Proper scenario analysis will let you review much more complicated and interesting options. For example you could ask yourself, how much cash would I have in the bank if I could shave 10% off my overheads by renegotiating with my suppliers and then increase prices by 8%. Based on the above figures it could mean an extra $58,000 in cash (before allowing for tax).

If you’d like to explore increasing your prices, or any one of a number of different scenarios for your business, get in touch with our business advisory team today. We’d love to help.