I often hear from my clients – small- to medium-sized businesses (SMBs) in the B2B space – that they just cannot raise their prices … especially with existing customers. I explain to them that their costs increase every year for salaries, benefits, materials, electricity, taxes, etc. and that those increased costs cannot be absorbed for long. Still, many are afraid that they will lose business if they raise their prices, and that unmerited fear means an ever-declining profit margin.
Let’s Look at the Numbers:
Assuming you choose to increase your sales price, the following chart demonstrates how many sales would need to be lost before you had less profit in your pocket.
First, let’s assume that you currently maintain a gross margin (profit) of 40% and you decide to increase your sales price by 10%. You would have to lose a total of 20% of your sales before you would have less profit. Is it reasonable to believe that you would lose 20% of your sales with a 10% price increase? Doubtful.
Next, let’s assume that you currently maintain a gross margin (profit) of 20% and you decide to increase your sales price by 4%. You would have to lose a total of 17% of your sales before you would have less profit. Is it reasonable to believe that you would lose 17% of your sales with a 4% price increase? Doubtful.
Finally, let’s assume that you currently maintain a gross margin (profit) of 60% and you decide to increase your sales price by 20%. You would have to lose a total of 25% of your sales before you would have less profit. Is it reasonable to believe that you would lose 25% of your sales with a 20% price increase? Doubtful.
To be fair, there are times where competition is so strong or where you are selling a commodity with no unique advantage that it can be dangerous to increase your price. However, with most SMB companies I work with, these are rare exceptions and provide a reason to find new markets and a Unique Value Proposition (UVP).
Bottom Line:
It’s about PROFIT … not REVENUE! If you raise your price (to cover increased costs or to shore-up your margins), you generally will NOT lose enough customers to reduce the total amount of profit and you should actually increase your profit in the end.
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