Setting prices as a small business can get tricky. From keeping customers happy to staying competitive with competitors, learn more with Fifth Third Bank.
Many small businesses say that pricing is a top priority, but few get it right. That could be doing a lot of damage to their bottom line—price is the most important factor in improving profitability, according to Bain & Company.
Depending on what your business is selling, a small price increase could lead to proportionally larger profitability gains. Small businesses can consider some best practices from the largest companies when deciding when and how to raise prices.
Know Your Competitive Landscape
The first step to raising prices without losing business is to research what your closest competitors in the market charge for their services and products, and how that relates to their costs.
Put together a matrix of quality and price point, and then add yours into the mix where it realistically fits. Often companies can find a market-based valuation for raising prices without losing ground to their nearest competitors.
Raise Prices Selectively
There are times when bumping up prices across the board might make sense, but a more prudent strategy is to raise prices on products with the lowest margins without touching higher-margin products. The reason: As the price difference decreases between lower-tier and higher-tier products, consumers are more likely to upgrade.
For example, a coffee shop might increase the price of its 12-ounce brewed coffee while leaving its larger brewed coffees and espresso drinks untouched. The strategy—which is one that's been used by Starbucks—can be a win-win. Price-insensitive customers order their usual and pay the higher price. Other customers recognize that they can get more coffee at a slightly higher price and order up.
Add a Benefit or Bundle
Another strategy for raising prices without losing customers is to add benefits that can boost customer loyalty without detracting from the bottom line. For example, a publisher might entice new print subscribers with free digital access or a targeted e-book culled from stories in its archives. Similarly, winemakers win over wine club members with complimentary tastings, access to special events and first dibs on high-demand vintages.
Technology and service companies, meanwhile, can mask price increases by bundling different service levels at different price points. There's often a suggested highlighted package that plays into the psychology of Goldilocks syndrome: this package is too small, this one is too big, and this one is just right. Naturally, the suggested package or product version must have the key function or feature that the lower-priced version does not have.
Communicate Changes with Your Customers
Customers hate being surprised by seemingly arbitrary price increases. Communication helps soften the blow. If, for example, underlying commodity prices are increasing, notify your customers that the price increase is the result of external factors. If a price increase is based on a perceived higher quality of product or service, be sure that the price hike is accompanied by an explanation these benefits.
In some instances, price transparency can deepen customer relationships. In a study led by a Harvard Business School doctoral candidate, customers said they were more attracted to a brand of T-shirts after it shared an itemized tally of what it cost to produce and sell the shirt. The strategy isn't for every company or product. If margins are significantly unbalanced, the researchers note, transparency can backfire.
Time It Right
Plan ahead so that a price increase can be executed at an optimal time for customers and not during crisis or without context. Netflix learned this lesson the hard way. In April of 2019, the movie streaming service lost a reported 123,000 subscribers after hiking prices by the largest amount to date.
The company might have avoided this by timing the increase with a new must-see series rollout, or waited until winter, when weather drives more people inside and to their favorite series. While there may never be an ideal time to raise prices, companies should define when the demand for their product or service is the greatest and use that as a starting point.
When it comes to pricing, it pays to be prudent and patient. When done right, small increases can do wonders for profitability. Done poorly, price hikes can alienate customers and open doors for competitors to swoop in with a better offer.