Why You Need to Raise Your Prices — Today

Every business tries to figure out how it can become more profitable – or at least every business should!

While running a lean operation is crucial to the sustainable success of any business, there is an overlooked truth here as well: you can’t save yourself into prosperity. Somehow, to become more profitable over the long run, you’re going to need to raise the top line of your business as well. And the easiest way you can do this is by raising your prices, today.

I know; I can hear you gasping: “I can’t raise my prices because I’ll lose all my customers!” And maybe that’s true. But are you so sure that your customers will be so quick to switch over to your competitors? There is ample research that shows, contrary to what economist might think, that customers are typically reluctant to switch based just on price – it isn’t perfectly elastic. There’s a convenience factor and a switching cost that you need to figure into your equation. Even grocery stores or gas stations can keep customers even if they offer higher prices because convenience factors like the location of the store become very sticky to customers.

You might also consider that perhaps its high time to fire some of your customers anyway – especially those they constantly demand attention while asking for discounts (you can read more about firing your customers here – link).

Unless you operate in certain areas like government contracting or the automotive supply world where you are contractually locked into your pricing, you are overlooking an amazing opportunity to immediately boost your bottom line. I think that because we’ve been in such a low inflationary period for so long, people have just grown to accept that you can’t raise prices – which is a mistake.

Let’s look at a simple example where we run a business that sells 10 million units for $1 each. Our gross margin is a healthy 10% (meaning it costs $0.90 to make each unit). That works out to $10 million in revenue and $1 million in profit ($10 million – $9 million). Now consider what happens if you raise your price per unit just 10 cents to $1.10. Now, if you sell the same number of units, your revenues grow to $11 million ($1.1 * 10 million) – while your costs remain the same ($9 million), which means you’ve doubled your profits to $2 million overnight. Was that easier than trying to find a 10% cost reduction to try and get the same result?

Even if you lose some sales, your higher price will insulate you. Let’s say you sell just 9 million units at the higher price. It’s a disaster, right? Wrong. That still works out to $9.9 million ($1.1 * 9 million) in revenue. And since you made fewer products, you spent less ($0.9 * 9 million = $8.1 million) – which means you still earned $1.8 million in profit.

Part of the strategy in raising your prices should also be how you can reinvest at least your extra profit to deliver a better product or service to your customer. That can help soften the blow of the increase and, just as importantly, ensure that your business continues to offer cutting-edge products and services your competitors might not be able to match.