Stratinis' Blog | Price Optimization and Revenue Management Insights and Tips

How To Raise and Lower Your Prices

Written by Stratinis | 11-Nov-2014 15:04:00

Entrepreneur understand you need to make changes to improve your bottom line, without alienating your customers. The decision to raise or lower prices is a tough one, with many ramifications for your business. But the decision whether or not to change prices is not as important as the decision about how to accomplish the change.

Raising and lowering prices effectively involves careful attention to timing. It requires knowing how to affect your customers' perception of the value inherent in what you are selling. It forces you to study and accurately predict reactions from your competitors. You should consider the following:

  • Decide how much to change prices
    Sometimes businesses announce major price hikes, even doubling their previous rates. One theory is that a single large price hike will get the pain over with. Businesses may also announce large price hikes when they've experienced major increases in the price of a key ingredient or cost component. A company that is being overwhelmed by sales volume from an unexpectedly popular product may jack up prices to reduce demand to a manageable level.If you have more than one product, consider raising prices on some items while leaving the others the same, or even lowering them. Some customers are sensitive to the slightest price hikes for a particular item while mostly ignoring other increases. Auto-mobile dealers use this fact to their advantage by cutting prices on cars as low as possible and attempting to make much of their profit on accessories like fancy paint jobs, about which customers are less price-sensitive.
  • Pick the right time
    If you decide to raise or lower prices, you must pick the right time. If you're lowering prices, choose a time when the change will have the most impact; if you're raising prices, choose a time when you'll encounter the least resistance. Your business's seasonality, growth stage and sales cycle affect your choice. Many retailers, for example, raise prices seasonally, usually in the fall when Christmas is near and rushed shoppers pay less heed to prices. A brand-new store early in its growth stage might delay a price hike, however, in a bid to gain market share. Meanwhile, a computer store catering to businesses is likely to ignore the holidays and time prices changes to coincide with new model introductions, which are more important to its sales cycle.
  • Change value and price
    Prices don't exist in a vacuum. Like the earth under your feet, a price is supported by the value the customer perceives in the product or service to which the price is attached. Thinking about price and value in this way makes it clear that this is at least a two-dimensional problem. That is, you can change the pricing and leave the value alone, or you can change the value and leave the pricing alone. You can also change both value and pricing or leave them both alone. Any one of these changes can be tailored to have the same impact on your bottom line, at least on an individual unit basis, but they may have vastly different effects as perceived by customers.

Read more at: http://www.entrepreneur.com/article/66010

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