Part of my schtick is that when first meeting a new client, I will almost always ask:
“Tell me right now, why can’t we raise your prices?”
It might sound blunt, but it cuts straight to one of the most underused levers in small business: pricing. Raising your prices is the fastest, cleanest way to boost profit. No new hires. No marketing spend. No equipment upgrades. Just new bottom-line dollars.
But I will lose some customers!
Maybe. Customers always come and go. And if you raise your prices, there’s no doubt that you will, at the margin, have a few drop off. The good news is that it’s likely the most price-sensitive ones, who are often a pain in the ass, and should have a PITA premium applied anyway (see this post for an explanation of the PITA premium)!
The heart of this tactic is understanding the tradeoff between volume and margin. Let’s say your business has an average gross profit margin of 40%. If you raise your prices by 5%, how many customers can you afford to lose without this resulting in a net margin loss?
Here’s the formula for you to try:
Allowable Drop in Volume = Price Increase ÷ (Price Increase + Profit Margin)
[everything is in %]
So in our case, the allowable drop in volume before we lose $ of margin is:
5% ÷ (5% + 40%) = 0.05/0.45 = 11.1%
We can raise prices by 5%, and if we don’t lose any more than 11% of (arguably our worst) customers, we will be ahead, dollar-wise.
Overcoming Your Emotional Resistance
Many business owners flinch at this idea. They hesitate; not because the numbers don’t work, but because fear, uncertainty and doubt kick in. Fear of losing customers. Or seeming greedy. Uncertainty about what you’ll do if too many walk. And doubt that you’re not actually worth it.
Fear not! Your customers likely aren’t as price-sensitive as you think. An interesting study from Boston Consulting Group indicates that while people say price matters, it rarely drives the final decision, and when it is a factor, it will depend on the market, category, or buying situation. You may not skimp on date night with your sweetheart, but you are budget-conscious when out with the kids for dinner.
There’s some solid academic theory, but it’s backed up by experience. In an earlier post, I outlined how I increased prices to Nortel, and they never even flinched. Our sales department was worried that we’d lose business, but we never lost a single deal on price.
Price As A Signal of Value
This Price-Quality heuristic has been confirmed across multiple industries. In fact, a higher price can increase perceived value, sometimes dramatically. There is a lot of research on this. Mats Godenhielm states in his study “High Price Signals High Quality” argues that “sellers cannot credibly communicate the quality they offer, and consequently price acts as a signal of quality.”
We assume expensive things are better.
My dad was given the task of running the Canadian Business Hall of Fame dinner in the late 1970s or early 1980s. The attendance had been dropping off, and they were no longer attracting the elite of Toronto’s business crowd to the event.
One of the tactics he used was to more than double the price of a table from $500 to $1,250. I remember my dad saying, “the CEO of [a big 5] bank doesn’t want to go to a $50 a plate dinner!”
They sold out for the next several years in a row.
That was a very early lesson for me on the power of price not only as a driver of profit, but as a differentiator. Look at how companies like Starbucks, Apple, and every high-end fashion house or luxury accessories brand command above-average prices.
Communicating Your Value
If a customer pushes back on price, it might not mean you’re too expensive. It might mean you haven’t clearly communicated why you’re worth what you charge.
Your job is to make the value so clear that the price feels like a bargain.
A few years ago, I was coaching the salesperson at a metalworking company. He was lamenting that the customers were saying we were expensive. My answer was that next time it happened, I wanted him to respond, “I know,” and then explain that our products are of higher quality than the competition, and we provide better service, which isn’t free. I said he should acknowledge, but never apologize.
Your price tells a story. It signals your place in the market. Low prices may attract bargain hunters but repel the customers you actually want who are willing to pay for quality, reliability, or alignment with their values.
Try It Without Breaking Everything
You don’t have to overhaul your pricing overnight. Start small.
Test new prices on new customers.
Even better, consider adding a premium version of your existing offering or rolling out a tiered pricing model.
Giving customers multiple choices accommodates different budgets, and if done well, can use price as a signal to steer customers to your most profitable tier, while making the customer feel that the chosen product was a smart, high-value choice.
As always, data is your friend.
Measure everything and adjust as needed.
But before you chase new revenue streams or crank up marketing spend, ask yourself: Why can’t we raise our prices?
You may not have a good answer.
If you liked this, you might like this related post about breakeven point.
