Should You Raise Your Prices This Year?

February 11th, 2022

The decision on whether or not to raise your prices is a tough one for any business to make. There are many factors you need to consider. Read on to find out what you need to know to help you make smart pricing decisions for your business.

How price influences demand

Prices can be heavily linked with the demand for many products and services, especially those that are non-essential. Basic economics tells us that if you increase the price for a non-essential product or service, demand for it will tend to fall (and vice versa). 

Consumers these days can easily research market prices for most goods and services online. Keeping your prices lower than your competitors can potentially help you to increase your market share. On the flip side, increasing your prices by too much can result in you losing business to cheaper competitors. 

If you’re going to keep your prices lower than your competitors, you need to make sure you're still profitable.

How to increase your profits without increasing your prices

There are two main ways to improve your profits without increasing your prices:

  • Increasing your number of sales.

For example, if you make $20 profit per unit of product sold, and you sell 150 units per week rather than 100, you’ll make more profit ($1,000 more in this example). You might be able to do this by increasing your advertising or changing your marketing strategy in some other way.  

  • Reducing your business costs.

For example, if you can increase your profit per unit of product sold to $25 rather than $20, you will make more profit if you sell the same amount (or even if you sell slightly less). You might be able to do this by negotiating a better deal with your suppliers or buying in bulk, or reducing some of your other business expenses. Your profit margin grows when you reduce expenses. 

How to identify when you need to raise your prices

Of course, there are times when there is no option but to raise your prices. This can be the best course of action when:

  • Your business costs are rising (and there’s no way you can reduce them), and
  • Your competitors are also raising their prices.

If your business relies on a lot of repeat customers, try to give them as much warning of an impending price rise and explain why it’s necessary. If you provide a good quality product or service, many of your customers will accept a justified price increase.

Rising consumer and business costs

Two important considerations in any business pricing decision are consumer living costs and business operating costs.

It’s an unfortunate reality that the cost of living is rising for many Australian consumers and businesses at the moment. Australia’s inflation rate is around 3%, which is the highest it’s been in years. 

Recent hikes in regular expenses like groceries, petrol and rent payments have been significant contributors to the rising cost of living. Consumer debt levels are also increasing, thanks largely to surging property prices.

Wages and business revenue in many industries, on the other hand, are not increasing at the same rate, placing increasing pressure on both household and business budgets.

Considering a price increase when the cost of living is increasing can be a hard decision to make. On the one hand, you don’t want to make your products or services too expensive for people, but on the other hand, you need to ensure the profitability of your business remains steady. 

The bottomline

Pricing decisions are among the most important that business owners make because they directly impact profitability. It’s crucial to regularly analyse your business prices in relation to your competitors, along with all of the other factors that contribute to your overall profitability.

Earlypay has supported Australian SMEs with fast and flexible alternative funding solutions for more than 20 years. Our invoice finance, and asset finance  products allow business owners to proactively manage their cash flow, freeing up your working capital for investing in growth. To chat about whether our solutions could be right for your business, call us on 1300 760 205.

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