Founder of Successwise, business coach and bestselling author of "The 1-Page Marketing Plan."
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When was the last time you raised your prices? For some reason, this very act causes massive anxiety in many business owners. They worry that by increasing the cost of their product or service, they’ll turn customers off.
So instead, they waste all their energy and resources on attracting and converting new leads to customers. There’s nothing inherently wrong with this strategy, except that you’re leaving a ton of money on the table. The real money is made with your existing customer base.
Each year things become more expensive due to inflation. Unless your cost base has lowered, which is unlikely, in effect, your income is decreasing. So your margins are likely going down, and that’s a pretty important reason to raise prices.
Here’s another good reason to raise prices. Price is a signal that tells us whether this is a high- or low-quality product. Consumers often judge products based on price, so in some circumstances, raising your prices is likely to create more demand.
Here are four ways to know whether or not you're ready to raise prices:
1. Your close rate is over 80%.
This is a rule of thumb I use in my business and with all of my coaching clients. If your customer conversion rate is over 80%, your prices are probably too low. Ideally, you want your close rate to sit in the 75%-80% range.
If your conversion rate falls within this bracket, I’d recommend reviewing your current prices and making a few necessary increases. If you deliver something that’s of high value, your customers are far less price-sensitive. I have continuously raised my prices over time, and my conversions have gone up. It really all comes down to perceived value.
2. You haven’t raised your prices in a long time.
It seems simple enough, and yet, this concept gets a lot of pushback from my entrepreneur clients. They worry that demand will drop off. But often, when something is cheap, it creates resistance and friction. So raising your prices can have little to no effect on demand.
For example, I had a client in commerce who hadn't raised his prices in years. He does about 300 transactions per day across Amazon and Shopify. While his product’s not unique, it's very nicely packaged and presented. As a bit of an experiment, we agreed to raise his prices by one pound. It had zero effect on demand. Instead, with 300 transactions a day, he added ￡9,000 to his bottom line, and that’s pure profit.
Now, he could have doubled the price. If you double your price and demand halves, your revenue stays the same. Yes, your customer numbers go down, but so does your cost of service. You may also deal with fewer hassles because you probably eliminated your sub-optimal customers. Sometimes, it can work in your favor.
3. You've received competitive reviews.
It’s important to check out your marketplace. Look at what your competitors are doing. How are they performing? What are they charging? Do they offer a similar product or service?
Use this information to your advantage and as a rough guide when determining price. But don’t let the market dictate your pricing. You still want to charge what you think you’re worth. And this is super important.
Many entrepreneurs calculate price based on time spent and materials used, and then build in a 20% margin. Consider how much value you or your product adds to a person’s life and how you can capture a portion of that value.
4. You've done mystery shopping with your competitors.
Knowing where you are in the competitive marketing space is crucial to your pricing strategy. What are the strengths of your competitors? Is their shopping experience smooth? What could be very attractive to your customers? For example, it could be price. Sometimes it’s how you package your product. Maybe it’s a smooth experience from placing an order to receiving the product.
Being aware of what else is out there and understanding what makes you different means you can justify a higher price.
Now that you know when to raise your prices, let’s look at how you can settle on the right price for your market.
Top Tips For Raising Prices
A great way to counter nerves around increasing costs is to grandfather your prices for existing clients and raise prices for newer clients. This works particularly well for subscription-based and coaching businesses. Here’s why:
• It rewards existing clients because they’re not affected by the price increase.
• It creates loyalty because they know they’re getting a good deal.
Consider how much of your price affects someone’s budget. For example, if my local coffee shop increased their prices by 20%, I probably wouldn’t notice; whereas if my landlord raised my rent by 20%, I’d notice for sure.
Price products just under a round dollar amount, for example, $497 or $99. For some reason, people are more inclined to buy if it’s not rounded off.
Make the value of the offer seem higher than the asking price. For example, highlight the normal price of an item and state the average gains for past customers. Don’t be afraid to include a story about why you’re increasing the cost. Customers appreciate transparency.
Don’t enter into pricing wars with competitors. It’ll never end well.
And lastly, build in room for discounts. Not only do you now have the knowledge of when to raise prices, but you have some strategies for implementation. Go forth and raise prices, but do so in a way that makes sense for your bottom line.
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