According to the latest BOC Quarterly Outlook Survey, sales growth continues to be a challenge for businesses. “Roughly half of businesses said that their pricing practices are not yet back to normal,” the survey reads. “On balance, firms are still planning to make larger and more frequent price increases than they did before the COVID-19 pandemic. But they expect to raise their selling prices at a slower rate than in the past 12 months as the pace of increases in their input costs slows.”
So, is it time for you to revisit your pricing?
Remember, the price you set for your products or services should be high enough for you to make a profit but realistic enough to encourage people to buy. It’s not as simple as adding a margin to your costs or charging what the competition charges. That may not be enough to cover your overhead. And, more and more often, reports of customers feeling “enough is enough” when it comes to price increases suggest a delicate tipping point is upon us.
This is why an important first step is to calculate a baseline pricing window and then determine what your next move might be.
How to calculate your baseline pricing
To price your products and services accurately, there are a number of steps to take.
Come up with an overhead and profit amount
First, work out the cost of your overhead. These are fixed costs you must pay out every month, regardless of your level of sales, such as your lease or mortgage payments, wages and salaries, power and other utilities, the salary you’re drawing from your business, and inventory (to name a few). Then, add what profit you’d like for the year to come up with overhead plus profit amount.
Choose a pricing option
Three main pricing options can help you determine your baseline price:
- Cost-plus-pricing: This is where you calculate all the costs involved in producing your product or service, add a margin and determine how much you can produce. Does this price cover overhead and profit?
- Retail margin: If you re-sell products as a retailer or wholesaler, add a margin to your inventory as a percentage of what you paid.
- Markup: Markup is different than margin. Your markup is where you might buy an item for $100 and re-sell it in your store for $150 for a markup of 50%. To calculate your margin, you divide the markup profit of $50 by the sale price of $150. In this case, your margin is 33% ($50 divided by $150). When you know your margin, you can use it to work out your sales target to cover overhead. Say your annual overhead is $200,000. Divide your 33% margin into your $200,000 overhead, and you’ll get a sales target of $606,000.
- Hourly rate: If your business is service-based and you charge per hour, it’s much simpler, as you won’t have physical costs of materials or inventory. If you charge $100 an hour, then dividing this into overhead gives you the number of hours you need to charge clients each year. In this case, 2,000 billable hours at $100/hour could achieve $200,000 in income ($200,000 divided by $100/hour). Remember, most professionals typically work more than the number of hours that can be billed to a client (i.e., revenue), so set realistic forecasts by looking at your billing history.
Compare your prices against the competition
Deciding what you want to charge doesn’t always mean you can go ahead and set your price. Your industry likely has a current market price, and it may be difficult to justify charging twice as much (or half as much, for that matter) for a similar product or service as your competitors.
It’s important to research the current price structure of your industry and gain an understanding of which businesses are seen as offering the best value and what customers expect to pay – and then determine where you want to be positioned across the price range.
Three questions to ask yourself before raising your prices
If you’re still considering revisiting your pricing strategy after taking these steps, ask yourself these three questions before changing any price tags.
Have you exhausted your options to increase sales at your current prices?
There are a number of ways to generate revenue — and chances are, they’re not all currently in play. Is there more you can do to boost revenue without boosting prices — and, in turn, generate more profit? Here are some ideas:
- Abandon a one-price-fits-all approach. Consider surcharges and fees for rushed delivery or less-than-minimum order quantities
- Adjust your product design: Tweak materials, packages or product features in response to elevated costs while maintaining the functionality and quality your customers expect
- If you haven’t launched an online store, start selling your products/services digitally to reach a larger audience
- If you are online, increase traffic via digital tools and advertising
- Consider franchising
- Think about charging customers a monthly fee to access your product or services online
FREE DOWNLOAD: Evaluating Your Options to Increase Sales (rbcroyalbank.com)
Can you differentiate your business beyond price?
Consumer studies repeatedly show how buyers will switch brands following bad customer service — and how stellar customer experience generates loyalty and fans.
Can your company lean into service to differentiate itself? You may be able to gain more customers — and earn more revenue — without increasing prices. Can you provide new services above and beyond what the competition offers or offer added value to elevate the overall customer experience?
Some ideas include:
- Personalize your marketing efforts and customer interactions to connect with customers emotionally
- Make it easy to do business with you — establish a flexible return policy and fast delivery
- Provide expertise/thought leadership to your customers
- Prioritize environmental and social responsibility. From charitable donations to sustainable packaging to community programs, make it known how you’re giving back
Tip: Revisit your business plan before you increase prices. Try the free RBC Business Plan Builder
What is the opportunity cost of increasing prices versus keeping them level?
Raising prices across the board amid inflation may damage customer relationships. Understanding how your customers might react to a price increase is vital when considering one. For instance, are your customers particularly price-sensitive? Are they dealing with inflationary prices in other areas of their lives? Are they likely to buy elsewhere if you raise your prices?
If you do increase your prices, consider the following tips:
- Communicate clearly to customers when new prices are in effect
- Give them plenty of notice before prices go up
- For loyal customers, consider quantity discounts before increasing prices across the board
- Consider telling them why. If your materials have increased 20%, share that with customers so they understand where this move is coming from
Getting your pricing right is integral to the ongoing health and resilience of your business. But it is tricky — especially if your own costs are going up and your profits are taking a hit. Before increasing your prices, be sure you consider your other options as well as your customer impact so you can maintain both relationships and sales.
This article was originally published on RBC’s Discover & Learn blog.