The Case for Higher Prices
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.
Even if you don't let the problem go that far, however, you're damaging your business in other ways by not raising prices on a regular basis. For one thing, you're gradually undermining the perceived value of your services or products. Like it or not, there's a natural tendency to link quality and price. I'm not saying you always have to charge as much as the most expensive suppliers, but if the gap between your prices and theirs gets too large, customers will start to regard you as the cheap alternative in the market.
At the same time, you'll be undermining the real value of your business as a whole. That's a point most small-business owners miss. They look at the company only as a source of income. They forget that it's also a major asset, probably their most valuable one, and -- like any asset -- it needs to be maintained.
That means, among other things, making sure the company has strong profit margins -- as good as or better than the rest of the industry's margins. If you let your margins erode, you're going to have trouble when you try to sell the business. Indeed, you may not be able to sell it at all.
It's sort of like selling a house. If the place needs a new roof, buyers will discount the price accordingly, or they'll look for a house that doesn't need one. By the same token, business buyers are going to shy away from a company with weak margins, especially if they're weak because prices are too low. Who wants to buy a business and immediately start raising prices? Even under the best of circumstances, it's tricky to maintain a customer base through a change of ownership. It's almost impossible when you have to begin by doing something that will antagonize every customer you have.
So I'm sorry, Mr. Greenspan, but I'm going to keep raising my prices, and I'd advise most other businesspeople to do the same. The increases don't have to be big ones. In this economy they can't be. I have to fight for every increase I get, but I always insist on raising the price at least a little. Had Judy raised her prices a dollar or two a year over the past decade, she'd have competitive rates today, and no one would be complaining.
I have to admit, however, that there is one group of people I'd encourage to ignore my advice and give Mr. Greenspan a hand in his fight against inflation: my suppliers.
Norm Brodsky is a veteran entrepreneur whose six businesses include an Inc. 100 company and an Inc. 500 company. This column was coauthored by Bo Burlingham. Previous Street Smarts columns are available online at www.inc.com/keyword/streetsmarts.
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