I've written before about the exponential impact that raising prices can have on your profits and bottom line. The challenge is that inflation has been low for a couple of decades now. That makes it difficult for companies to push price increases for their products and services.
When inflation was rising at a rate of 12 percent, nobody blinked an eye if you raised your prices 13 to14 percent because everyone understood that costs were going up at a similar rate. But in today's low-inflation era, the expectation among customers is that companies will find ways to increase productivity to absorb any cost increases. In fact, many customers now expect prices to go down.
So, if you want to find ways to increase your prices, we need to look for some other strategies where you might be able to nibble your way to asking for higher prices.
1. Eliminate something for nothing.
Take a hard look at your business and see where you might have areas where you are giving away services for free that you might be able to charge for. I remember in one business I ran, we offered to recalibrate our machines for free. But that was also a business that third-party labs charged for. As soon as we made the switch and began charging for this service, it turned into a highly profitable million-dollar revenue generator--for a service we were already doing for free. As another example, consider how the airlines have mastered this art. It does not cost them $50 for you to change a ticket, nor does it cost them an extra $50 to check your bag. Finding a way to charge for those services, which used to be free, has become an effective way for airlines to pass along a price hike to their customers. Some reports indicate that airlines were making most of their profits from fees before Covid. It's worth looking to see if you might be able to do something similar inside your business.
2. Put in escalators.
Another way to pass along a price increase is to play the long game with escalators. This is a lesson that real estate learned a long time ago. Just look at any commercial real estate lease. Each lease contains an escalator clause that increases the price each year after the base year, usually by 2 to 3 percent. But most people spend so much time negotiating that upfront rate, they forget about how that price will go up over time. For instance, I rent some space for a CrossFit gym I own. When I signed my lease, it was for $35 a square foot. That's now increased to $45. I don't even know if that's at market rate anymore, but it's what I have to pay because it's part of the lease I signed.
3. Augment your product.
One of the ingenious ways that the famed corporation General Electric implemented price increases over the years was by building new revenue sources around its core products. When GE sold jet engines, for example, it also began offering service contracts and spare parts for its engines. The company also offered training and financing as an extra service, all of which it charged for. These services, which some companies might realize they have been offering for free, ended up being more profitable to GE than the core product itself.
4. Offer warranties.
Another way to offer a subtle increase in your prices is by offering a warranty, which is basically an insurance policy you offer your customers against future defects. They can be very profitable for a reliable product. The advantage you have as the manufacturer is that you understand the quality of your product and when it might actually need maintenance. Think about the last time you bought something from, say, Best Buy. The first thing the company will ask you after you buy your new big-screen TV is whether you want the extended warranty with it. What's remarkable is how many people say yes, because warranties now account for the vast majority of Best Buy's profits.
5. Offer financing.
Another way you can build in some extra pricing and profit is by offering your customers an opportunity to finance or buy the product over time. This can work in your favor if you, say, can borrow money at 2 to 3 percent and lend it to your customers at 7 or 8 percent for the convenience for paying for a product over time.
Yet another strategy for nibbling at increased prices is finding ways to bundle your products, which gives you more opportunity to sell higher-margin items. If you go to buy a camera on Amazon, for instance, you'll also see that "other customers also purchase" items like a case, an extra memory card, or a tripod. Even if you might offer a discount on the bundle, you are still driving revenue higher, and profits, by giving the incentive for the customer to purchase the high-margin accessories.
So, remember that increasing prices is an incredibly powerful way to drive profits inside your business. But if you're having a hard time convincing your customers that it's time for a price hike, don't launch a full frontal attack then. Rather, use some of the nibbling strategies I've outlined above to help grow your bottom line.