What is a pricing strategy?

A pricing strategy is an important concept that businesses use to determine the appropriate price for their products or services. A company’s goals vary according to their market, costs and branding, so there’s no single optimal pricing strategy. Regardless, a good price should accurately reflect the product or service’s value while also accounting for operating costs. Strategic pricing and raising prices helps your business maintain a healthy profit margin ratio for long-term profitability.

Some pricing strategies include:

• Competitive pricing
• Freemium
• Dynamic pricing
• Penetrative pricing

Read more: How to Determine Pricing for Your Business

When should you increase prices?

Depending on your overall business and pricing strategy, there are many different circumstances in which you might need to increase prices.

Improve profit margins

As your business grows, you may need to obtain additional financial support from lenders, investors and creditors. To do so, your income statement should show a healthy profit margin so lenders can see that your organization is profitable long-term. If your profit margin isn’t ideal but you can’t cut back on expenses, you may need to raise prices.

Related: Locating an Investor: Five Steps for Your Business

Account for rising costs and expenses

You may initially have a healthy profit margin, but the ratio has become less efficient as suppliers and service providers increase costs. Some material or service prices have fluctuating or generally rising costs, which you’ll eventually need to reflect in your pricing. Additionally, consider any significant nonrecurring expenses that you might have, such as one-time equipment purchases.

Match inflation

Keep an eye on inflation when raising costs. It’ll inevitably increase over time, which means that many of your customers are probably earning and spending more. Your prices should likewise increase.

Invest in more productive labor

As you increase the complexity or quality of your goods and services, you may need to hire more qualified employees, like managers or specialists. You’ll also need to increase the wages of other employees to account for inflation and improve employee satisfaction. Although employees may increase your payroll costs, they can contribute to higher productivity. If your profit margin suffers too much from labor costs, you’ll need to reconsider your labor strategy or raise prices.

Related: What Is the Cost of Hiring an Employee?

Increased market demand

Depending on the market and the elasticity of your product or service, demand may fluctuate and sometimes rise. If the demand goes up, raising prices may generate additional revenue. Be careful to be fair to your customers and avoid price gouging if your goods are necessities with inelastic demand.

Related: How to Manage Unexpected Business Demand

Market competition

Investigate your market competition to determine if your pricing strategy is correct. If the average price for similar goods or services is significantly higher, you may be missing out on revenue.

Raise prices for busy seasons

If your organization experiences certain busy seasons, you can anticipate that customers will be coming to you regardless. That means you may be able to raise your prices without losing many customers, especially since competitor businesses likely also implement higher peak-season prices.

Implement new market strategy

Depending on your business’s growth and direction, you might be ready to shift from your original market strategy. If you initially marketed your products at lower prices to penetrate the market, you may choose to rebrand as a more premium service or product. While some consumers may find a high price tag off-putting, others specifically look for high-end goods.

How to increase prices without losing customers

Many business owners fear they’ll lose customers if they increase prices, but it’s important for long-term success. We’ll look at a few ways to increase prices without losing customers or sales.

Be transparent

When you raise prices, you may choose to let your customers know ahead of time by email or other means. Be transparent and let your customers know what factors are contributing to your increased prices. Although you may lose some customers, many will appreciate the transparency and possibly even affirm that the value and increased price of the product are well-aligned.

Recognize and reward customer loyalty

If you’re letting your customers know that you’re increasing prices in advance, you can offer to purchase or book at a lower price beforehand. This can be especially helpful for prebooked services since you’re guaranteeing future revenue. You can also offer temporary discounts to long-time customers in appreciation of their loyalty.

Don’t announce price changes

Alternatively to transparency, you can opt to not acknowledge price changes at all. Although some customers may leave, many won’t notice small increases.

Increase prices incrementally

Regardless of whether you announce price changes or not, increasing prices incrementally can help soften the effect. Again, many customers won’t even notice or care if your prices increase incrementally. For example, you can set a higher target price for the end of the year and make small increases each quarter.

Emphasize quality

If you’re raising prices significantly, customers will expect the quality to match the price. Ensure that your business demonstrates only quality services, especially if you’re facing negative price-increase feedback.

Add premium options

As an indirect way of increasing prices, you can add premium or free options to raise total revenue with few or no additional operating costs. Offer things like alternative product colors or pricing tiers that include extra services or upgrades.

Offer bundled products or services

If you increase pricing on all of your offerings, you can bundle products and services together to make them more appealing to customers. They’ll see the bundle as a deal, even if the cost for each item is the same or higher than before.

Adjust product amounts

If your business distributes products by portion, volume or weight, you can slightly reduce the amount you give customers but keep the price the same. You increase the unit price in this way, but customers are less likely to notice the change.

FAQs about raising prices

Why is price important to customers?

Price is a factor in how customers perceive your goods or services. If prices are too low or high, customers may inaccurately perceive the value of the good or service. Buyer persona is also important, since preferences vary between low- and high-end products.

What is price gouging?

Price gouging is when a seller increases the price of their products or services to an unreasonably high amount. Even if demand is high, price gouging is an exploitative tactic. Customers can recognize this and perceive price-gouging businesses as unethical.

Why do businesses lower prices?

Lowering prices can sometimes generate higher revenue. A microeconomic analysis can determine where demand and price intersect and interact, yielding the greatest amount of sales at an ideal market price.