Price is what you pay. Value is what you get.
-- Warren Buffett
I am helping a long-standing business that has done well over the last 20-plus years. This business has truly become part of the fabric of the community, but the owner plans to retire in about five years and knows he will have to sell his business when that time comes.
He also knows that in order to get a price that will generate the retirement income he desires, he will need to improve his profitability. Problem is that he feels he has no options for profit improvement since the economy is not doing as well as he would like and he has already trimmed his expenses back as much as he is comfortable with.
I have had numerous discussions with this entrepreneur and I know he clearly understands the problem, but he is just hesitant to raise prices across the board in this environment. A price increase, however, has no cost offset, meaning that any increase in profit will increase the bottom line by the same amount. A two percent increase in prices will, therefore, improve his bottom line by more than $100,000 and allow the
value of the business to increase.
Raising prices is not always the ideal strategy, but it is the way to get here - so long as it is fair and competitive. The trick is ensuring customers do not perceive the increase as excessive.
In this business' case, they are now charging for some services they formerly provided free of charge but really should have been charging for all along. Additionally, by judiciously going through all his product and service offerings, he has identified items he could raise rates on without making much of a difference in the total price.
For example, an item he previously sold for $51 he can now sell for $54, which is about a six percent increase. Not all items have that kind of flexibility in pricing and many items he will not be able to raise prices at all; however, he is looking to average a two percent increase overall.
If your business is trying to increase profits, raising prices is something you might consider in today's economy. However, you have to be careful when doing this so as not to alarm your customers. The key is keeping the increases small and looking for ways to camouflage them.
Now, before I get inundated with mail saying I am encouraging businesses to take advantage of their customers, let me say that I would never advocate charging an unfair price for any product or service. Price increases must be fair to both the customer and the business - a business needs to charge a fair price in order to remain competitive and keep their operation going.
If you need to improve your profits, go out and look for ways you can increase prices - always remaining fair to the consumer, of course. Take a look at services your competition is charging for but you are providing complimentary and where your prices are behind the field.
Jerry Osteryoung, a consultant to businesses, is the Jim Moran professor of entrepreneurship (emeritus) and professor of finance (emeritus) at Florida State University. He can be reached by email at firstname.lastname@example.org.