Let’s face it. In today’s world, nearly every business has needed to increase its prices.
Most business owners, however, are uneasy and reluctant to actually do anything about increasing prices because they fear that all of their customers are going to leave them for somewhere or someone else.
Here’s the thing. Some people are going to leave simply because they have NO brand loyalty or are the price shoppers. Others are understanding and will wait to see what that business does in the future.
At the end of 2021, we needed to increase our prices on our web hosting business, CCNJHost.com. Our internal cost structure was getting too costly to continue providing web hosting accounts for as low as $20 per year – our reseller provider increased their rates by 30% year over year and had been increasing their costs every year on us! We absorbed as many of the price increases we were in a position to absorb but eventually, we needed to pass along those costs.
What we did was we offered ALL of our customers the option to renew early and get their next term – even if it was an annual term – at the existing rate before we passed along the increase on December 1. About 2/3 of our customer base took us up on the offer and renewed early. The other 1/3 of our customer base didn’t take any action – and they didn’t leave either, except for one that just recently left because her web developer put her site on his server.
Why didn’t they leave, you ask? Because our customers are loyal to us – we have had some clients that have been with us since we launched our program in 2008. We also softened the increase by offering them the early renewal which allows them to amortize the increase and save at that moment.
Let’s look at an example: If you sell a widget for $100 and want to increase your pricing by 10% to $110, that additional $10 is PURE PROFIT. If your costs are $70 per widget, you initially had a 30% profit margin, before increasing the price. You would now have a 36.36% profit margin or a 20% increase over where you were by simply adding 10% to the price!
For you to make $1,000 in profit selling your widget at $100 each, you would need to sell 33.3 widgets.
By increasing your costs though by only 10%, you only need to sell 25 widgets to get the same $1,000 in profit.
That means that to break even, you’d have to lose 25% of your customers over this 10% increase and that is not likely going to happen!
A word of note though – ALWAYS test increases on a small subset of your customer base before passing along the increase. If you don’t, you may be priced out of your market and may lose more, but when done properly, you can be helping to add more value to your business.
What are you going to do with your pricing strategy now?
