In this economy, most businesses are caught between rapidly increasing prices of commodities and raising prices for their goods and services.
For one firm that we are assisting, the cost of steel increases almost every month. It has already gone up by 10 percent in the first six months of the year. Competition also has increased, so the firm feels that it cannot raise prices despite the fact that it is being squeezed by both steel and fuel price increases. Clearly, the owner is very concerned about maintaining profits.
So many firms in today's economy are experiencing a similar squeeze. Firms are now worried about losing sales and profits. However, there is so much a business owner can do to mitigate the damage caused by price increases.
If you are competing with other firms, it is important to remember that they have to buy the same products you do and are experiencing the same price increases. If many firms in an industry begin raising prices, consumers will be able to understand and tolerate the increases that you implement.
Most consumers understand that in order to stay in business, a firm needs to make a profit and cover its costs. Most will tolerate a 5 percent increase in price, especially if you clearly explain why you are doing this.
For example, we are working with one service industry firm that increased its prices mid-year by 6 percent. Following its price increase, it saw no decrease in sales. In fact, some customers wondered why the firm waited so long to raise prices.
Firms should consider unbundling as many products or services as they can. Doing so will allow you to mask the price increase. For example, one service company previously included transportation in its pricing. It removed it from the bundle and began billing transportation costs separately.
What's important to remember is that receiving complaints from a limited number of customers does not necessarily mean the price increase was not tolerated. Rather, certain customers are always going to complain about price increases.
Raising prices to cover cost increases is simply good business and economics. If you are, however, in an environment that prohibits you from increasing your prices, you may need to think about the products or services that you are providing. It may be that you are in a much too competitive environment, in which case you will need to find better ways to differentiate your products and services from others in the market. You may also find that certain products or services are no longer viable for your business.
Jerry Osteryoung is the director of outreach of the Jim Moran Institute for Global Entrepreneurship in the College of Business at Florida State University, the Jim Moran professor of entrepreneurship and professor of finance. He can be reached by e-mail at jerry.osteryoung@gmail.com or by phone at (850) 644-3372.
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Jerry Osteryoung x jerry.osteryoung@gmail.com
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