I’m often surprised by how many small business owners and entrepreneurs feel that they are unable to raise their prices. Even when the prices of their rent and supplies go up, they are afraid to raise their prices because they think their clients will not be willing to pay. So instead, they end up absorbing the additional costs.
They do this year on year. I’ve heard of businesses who have not raised their prices in 10 years, even when inflation itself had caused a 20% overall increase in costs.
What is the problem with this scenario?
These businesses end up bleeding money and after a certain point, the owner will realise that the business is no longer profitable. In fact, it is making a loss. So now they have to do a huge price increase just to return back to the point where they are covering costs and making a small profit. The problem is, their clients will definitely be resistant and unhappy about this high price increase because it’s a big jump from the previous price.
A better way to manage this would be to do a yearly review and adjust prices or develop new strategies to make more money. Doing a yearly review means that you can make small increases that your clients are unlikely to complain about. 2% increase every year over 10 years is definitely more palatable than sudden 20% increase.
If you have no idea if you need to raise your prices, start by finding out if you are making or losing money in your business.
Six months is normally quite a good gauge of what’s happening in a business. So a quick and easy way would be to take a look at your bank statements for the past 6 months . Add up all the incoming credits. This is your revenue. Add up all the outgoing debits. These are your expenses. If the number you have in revenue is smaller than the number in expenses, you have a problem. This is because if you are spending more money than you are making, obviously your business is making a loss. Even if your bank account looks healthy now, eventually you will run out of money.
How do you fix this?
If you have not raised your prices in the past 3 or more years, it is time to do a review. For every single product or service, calculate how much it takes for you to deliver this product or service. You must take into consideration things such as rent, wages of staff, operating costs.
For example, imagine a photographer who takes studio shots for $100/hr. He can generally shoot 4 hours a day, 20 hours a week. The other 20 hours is spent on editing the shots. So in a month, he will likely shoot for 80 hours, edit for 80 hours. His revenue is 80 hours x $100/hr which is $8,000 per month.
The rent for the studio is $2,000. His assistant costs $2,500. His website, email, advertising and other operating costs come up to $500. Equipment such as computer, camera, lenses are depreciating at a cost of another $500. Total monthly expenses is $5,500.
Revenue – expenses = $8,000 – $5,500 = $2,500
Essentially, he is making only $2,500 a month, working 40 hour weeks. The same as what his assistant is making. This scenario is slightly depressing, but very common.
If this feels familiar, it’s time to make a change. Let’s see how you can make more money, by taking the same example and making some adjustments.
1) Raise your prices.
Work backwards. Figure out how you want to make in a month. Take the same photographer example. If you want to make $4,500 a month, you need to make an additional $2,000 a month. This means that your new total revenue needs to be $8,000 + $2,000 = $10,000. Divide this by the same number of hours a month = $10,000 / 80 = $125. Your new rate needs to be $125/hr
2) Create new products.
Think about what other products you could create. For a photographer, perhaps its some new packages. Bundled photo albums, framed wall photos or perhaps even including additional services such as video montage services. Create new products that you can sell to your existing clients as addons. This will easily increase your revenue without adding too much costs. If the photographer can sell $100 worth of new products to 20 of his clients, that is an additional $2,000 in revenue instantly.
3) Improve work processes.
If like the photographer, you are stuck in a time for money cycle, then the business is not scalable. Take the first step by recognising this and figuring out what are the low value activities. For the photographer, it could be the photo editing. Outsourcing photo editing either to the assistant or someone else will free up time for the photographer. This time can then be used for more photo shoots, networking for new clients or strategising to bring the business to another level.
So take a look at your business today and consider whether or not you need to raise your prices, create new products or improve some work processes.