Sunday, May 1, 2011

Pricing and Inflation in today's economy

Price is what you pay. Value is what you get.” ~Warren Buffett

One question every entrepreneur must answer is what price they should charge for their products. The immediate impulse is to keep prices as low as possible so you are able to attract the most business, but low prices do not necessarily generate the highest level of profits.

Today, costs are increasing with inflation and you may need to evaluate your pricing. Among others, the price of fuel is soaring, the cost of medical insurance is escalating, as are the costs of airline travel and a variety of raw materials. Cotton, for example, has increased in price by more than 30 percent in the last six months.

With inflation beginning to show its ugly head and cause dramatic cost increases, you may need to raise your prices simply to balance the added expenses. If you fail to do so, your profitability will plummet.

From a customer's perspective, pricing sends a strong message, and for many, pricing is an indicator of value. If a product or service is priced too low, it will be perceived by customers as subpar. Priced higher, customers will perceive a higher value.

One of my friends truly believes that the more she pays for an item, the better it is. I have seen her contemplate two very similar products, and without fail, she chooses the more expensive alternative. She believes that by doing so, she is getting more value.

Pricing also affects the types of customers you attract to your business. Depending on the clientele you seek, setting your prices low may bring the wrong type. If customers are only focused on prices, they are not loyal to your business. They see you and your products and services only as interchangeable commodities.

Between bargain hunters and loyal customers, it is much better to have loyal customers. To encourage loyalty among your customers, a business should never rely on pricing as the sole differentiator. You must set prices appropriately and compete on nonprice elements, such as service, experience and speed of delivery.

We have been helping a wonderful lady who operated a medical clinic. Despite the fact that she worked tirelessly, she was struggling with low profits. When we reviewed her income statements and talked things over with her, we discovered that she had very little control over her costs. The only element she could control was her pricing, and she had not raised that in five years.

When we suggested she consider raising prices, she was strongly opposed. She feared that if she upped prices, she would lose customers and eventually go out of business. When we worked the numbers, however, we quickly showed her that if she raised prices by 10 percent, she would pull in a higher level of profits, even if her sales fell off 20 percent.

She finally took our advice and raised prices. When she did, her customers never said a word. Her sales have decreased by less than 2 percent, and overall, her revenues have increased by 5 percent. Her profits have grown by 10 percent.

For this entrepreneur, raising prices had a minimal impact on her customers, but a big impact on her bottom line. Though she was fearful that she would lose customers, she discovered one important truth: generally speaking, customers will remain loyal to your business as long as the value they receive is more than the price they pay, and value is dependent upon a number of elements, not just price.

Now go out and take a look at your pricing. As inflation returns, you may find you need to raise prices to offset cost increases.

You can do this!

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