But there is a right way and a wrong way to raise prices. You don't want to alienate your existing customer base by raising prices too steeply, especially during a recession. "Rather than have a sudden increase, have a strategic plan over two to five years during which you gradually increase your price 5 to 10 percent," Toftoy advices. "If the business is in trouble and you say, 'Hey, I'm going to mark everything up"¦ that kind of scares people away. This way you haven't gone from $5 to $15. You've gone to $7.50 first."
"In terms of raising the price -- this is more easily accepted in 'good' economic times," Willett says. "As the underlying cost of producing the product rises, the customer is prepared to accept the rise in the price to them. If the customer perceives that the firm's costs are going down while their price is going up. This will not be received well and is likely to backfire."
When to Lower Prices -- and How
You may realize that you have missed your target audience by pricing your products too high. You can always choose to discount your products or give customers something for free in order to get them to try your product or generate traffic to your storefront or website. "You have to get people in," Toftoy says. "People like getting something for free or some kind of discount. You can make Wednesday senior citizen day when seniors get a 20 percent discount. Then maybe you can offer a student discount day. Then all you're doing is keeping the price the same, but to those people you're giving them a cut but it's not like you've lowered all prices."
Generally, lowering prices is not a good practice unless you are using this strategically to garner market share and have a price sensitive product or if all of your competitors are lowering their prices, Willett says. "An alternative to lowering price is to offer less for the same price which will effectively reduce your costs without appearing to reduce the value to the customer," she says. "Restaurants have found this particularly helpful in terms of portion sizes but this same strategy can be applied to service industries as well."
Monitor Your Pricing
Another key component to pricing your product right is to continuously monitor your prices and your underlying profitability on a monthly basis. It's not enough to look at overall profitability of your company every month. You have to focus on the profitability (or lack of profitability) of every product you sell. You have to make absolutely sure you know the degree to which every product you sell is contributing to your goal of making money each month. Remember: "People respect what you inspect."
Here are some other practices to help you price right:
• Listen to your customers. Try to do this on a regular basis by getting feedback from customers about your pricing. Let them know you care about what they think.
• Keep an eye on your competitors. If you don't have deep pockets and can't afford to hire a market research team, hire some college students to go out on a regular basis and monitor what your competitors are doing.
• Have a budget action plan in place. Try to have a plan for your pricing that extends out three to six months in the future.
You owe it to yourself and to your business to be relentless in managing your product pricing. Remember, how you set the price of the products could be the difference between the success -- or failure -- of your business.
Dig Deeper: Making the Case for Higher Prices
Related Links:
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Recession Pricing Strategies: How Low Can You Really Go?
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