The Case for Higher Prices

Thanks mainly to Alan Greenspan, it's harder than ever to get customers to accept price hikes. But, argues entrepreneur Norm Brodsky, you're making a big mistake if you don't raise prices on a regular basis.

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Street Smarts

It's harder than ever to get customers to accept price increases, thanks mainly to Alan Greenspan. But you're making a mistake if you don't raise prices on a regular basis.

Alan Greenspan is a wonderful guy, and he has my wholehearted support in his battle against inflation. I doubt, however, that he has the same warm feelings about people who share my philosophy on prices. I believe that as a matter of sound business practice, it's important to raise prices regularly.

Otherwise you'll be letting your profit margins erode and undermining the value of your company. If you're not careful, you could wake up one day and discover you're in serious trouble. At that point you may have no choice but to take the kind of action that will drive your customers crazy.

My wife, Elaine, came across a good example recently. For the past couple of years, she's been getting her hair done at a salon near our home. She started going there partly because the location was convenient, partly because she was tired of the fancier places in the area. Price was not an important factor, although it didn't hurt that the owner, Judy, charged substantially less than other salons did for the same services. Elaine took advantage of the lower rates by going twice a week instead of once.

Then, in December, Judy suddenly announced a set of huge price increases, effective immediately. A basic cut went up 25%, as did the cost of a blow-dry. The price of a coloring jumped 85%. The increases came as a shock to the customers. Some of them were angry enough to talk about leaving. Even Elaine was upset. She asked Judy why she'd done it. Why such big increases? Why do them all at once?

"I don't have a choice," Judy said. "We haven't had a price increase in 10 years. I've been giving the staff raises every year, and I haven't been getting any additional income. Now I'm at a point where I can't go on without a significant increase. I won't be able to pay my bills. The place won't survive."

She has my sympathy. It's never easy to raise prices, and it's particularly tough to raise them in an environment like this one, thanks mainly to Mr. Greenspan. He's done such a great job of fighting inflation that most people think prices shouldn't go up at all. As for big increases, you make them at your peril. There's simply no way to do it without antagonizing customers and thereby putting your most important relationships at risk.

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. Granted, you may not feel the pain for a while. If your sales are going up, you'll probably be able to take home the same amount of money from one year to the next. As a result, you may not see the risks you're taking. In the short term, you'll think you're doing fine.

But, in fact, two things will be happening. First, your profit margins will be shrinking. Why? Because your costs will be going up. Even in Greenspan's America, certain costs always rise. It's what I call "creeping expenses." Some types of expenses have a life of their own. If you don't watch them like a hawk, they go up all by themselves. They may even go up if you do keep an eye on them.

In most small businesses, for example, you can count on payroll increases every year. You can expect regular hikes in insurance rates as well, and I'm not talking just about health insurance. The costs of utilities and supplies also have a tendency to rise over time. OK, some things are cheaper these days -- basic phone service, for example -- and computers let people work more efficiently than before. Nevertheless, your average costs per dollar of sales are going to rise from year to year. They may rise only 2% annually, but compound the increases over 5 or 10 years and eventually you won't be earning a profit anymore -- unless, of course, you raise prices.

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