Let’s look at a few examples of how you can increase your prices (without losing business!)
Raising the prices of all your products by as little as $1 across the board would have a substantial impact on your bottom line. For example, if you sell an average of 100 items per day, this increase can generate an extra $100 per day, $700 per week or $36,400 per year, just by increasing each item by $1.
If your products already come with a Recommended Retail Price (RRP), you could relabel them with your own pricing, depending on how price sensitive your customers are! Apart from the time spent creating new labels, it doesn’t cost you anything to increase your prices.
What if you’re running a café? If you sell 2,000 coffees a week, a simple increase of $0.20 can increase your weekly takings by $400, or an extra $20,800 per year. This doesn’t cost you anything either, yet you brought in an extra $20,800 just by tweaking that price by $0.20.
What if you’re running a deli? In this type of business, the price is not usually the driving factor for purchases, it’s more about the quality of the items on offer. You could increase the price of your ‘per kilogram’ items by a few dollars because your customers probably have no idea what the per kg price is.
If there is no set RRP for your products and you are using a formula to calculate your markup, you could increase the markup itself. For example, you have an item that wholesales for $100. When you apply a 100% markup, the RRP is $200. You could add 5% so the calculation comes out at $205 — an extra $5 per unit.
You could do this across the board or even vary the formula depending on the category and what you think the market will bear. Often, when using your standard formula to price goods the retail price may appear to be too low. If you are not competing solely on price and offer quality items, you can certainly increase your prices and your customers will still be prepared to pay.
If you work in the services industry, it’s normal to charge an hourly rate. This is not ideal because you get ‘stuck’ on that rate, scared to increase it in case your clients leave. When your clients are used to a certain hourly rate, it can be difficult to move them from that structure.
However, it might be easier if you have a set fee. The idea behind this is to ensure that you scope your services, clearly defining what is included and what is not. This can suit ongoing services as well as project related work.
By clearly defining exactly what you will be working on, how long you estimate it will take to complete the work and what your ‘internal’ hourly rate is to achieve this, you can determine a set project price and perhaps offer a payment cycle (e.g. monthly) over the period of work. This allows you to ‘value-base’ your services, so that your clients focus on the value they derive from working with you, rather than focusing on what you ‘cost’ per hour.
What about ad hoc tasks? Well, if any tasks happen to fall outside the scope of work, you can let the client know and prepare another proposal to cover this work.
Over time, you will get more efficient at carrying out the project work, thereby effectively increasing your internal hourly rate and increasing your margin on services. Here’s an example: You quote 20 hours at your internal hourly rate of $100, which scoped the work at a value of $2,000. Your cost of labour and overheads for this work is $40 per hour, leaving a margin of $60 per hour profit, equating to $1,200 profit on this work.
If you manage to deliver the work in 15 hours instead, you arrive at an effective hourly rate of $133.33 ($2,000 divided by 15). You have effectively increased your internal hourly rate by 33% and increased the profit on this work by $266 to $1,466. Now I’m not suggesting you rip your clients off but it’s all about value! If the client perceives the $2,000 to be value for money for the work involved, and it happens to take a shorter time to complete than you thought, that is your win.
If you had charged an hourly rate, you would have received $1,500 revenue with a cost of $40 per hour and thus a profit of $900, compared to $1,466. I know which profit per job I would prefer!
It’s all about the numbers, so play with your pricing and tweak it. As demonstrated above, even slight adjustments can deliver substantial improvements. If you’re reluctant to increase your prices, speak to your accountant and let them show you how simple it can be.