Pricing

RAISING PRICES

Small business owners are often reluctant to raise prices once a good baseline price has been established. They worry that a price increase will alienate customers and drive them to the competition. "Faced with such resistance, a lot of businesspeople are tempted to forgo price increases altogether, or at least put them off for as long as possible. If you do either one, however, you're making a big mistake," Norm Brodsky wrote in Inc. "Your profit margins will be shrinking…. You're gradually undermining the perceived value of your services or products." Brodsky noted that many of a small business's costs—such as payroll, insurance, and utilities—tend to rise every year, slowly cutting into profit margins. In addition, customers tend to associate price with quality. A business that does not increase prices to keep up with the competition risks being regarded as the cheap alternative in the marketplace.

When price increases are implemented gradually and cautiously, small businesses may be able to keep their customers happy while also keeping their profit margins intact. Customers typically base their purchase decisions on more than just price. Other factors influencing the decision process include quality, features, guarantees, and personal desires. In addition, people will always pay more for good, reliable customer service. In order to make an effective price increase, the business owner should be ready to explain the increase to the customer if asked. The more straightforward and justified the answer, the more effective it will be to cause a customer to nod—not with pleasure, to be sure.

SURVIVING COMPETITORS' DISCOUNT PRICING STRATEGIES

Major discount stores such as Wal-Mart, Sam's Club, Target, Kmart, Office Depot, Staples, Best Buy, and Circuit City have gained control of large blocs of the American business world over the last several years on the strength of their one-stop shopping and discount prices, the latter a result of their ability to buy goods at bulk rates. Many small business owners have felt the impact of these stores—indeed, cautionary tales concerning the impact that such stores can have on formerly vibrant downtown shopping areas have proliferated in recent years.

Surviving such assaults may not always be possible for the small business. A fundamental rule of pricing is that no one who is sane continues to sell below cost. When the "Big Box" moves in next door, the small business can only survive by changing—and sometimes only by changing radically. Hopeful observers suggest that small businesses innovate their way out of such competitive difficulties. They should offer more personal service, develop a niche the "Big Box" has neglected, segment the market more effectively, and/or adopt similar strategies. Yes, change is possible—but difficult if the small business cannot extract the assets invested in the business or if it was not wildly profitable and thus doesn't have reserves of cash. The best defenses are alertness, anticipation, and action before the inevitable happens. On the first news of the "Invasion of the Boxes," the business owner should be dusting off contingency plans and getting ready to liquidate, to move, or to change the business into something very different. The big retailers greatly increase traffic in and around their operations. One possibility of radical response may be to put up something nearby to tempt the masses drawn by low prices produced by Chinese labor. An ice cream shop, perhaps? It's a big change from running a family lumberyard, but entrepreneurs are endlessly creative!

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