Photo (CC) by Ken Teegardin, on Flickr

Many small-business owners fear that an increase in prices will drive customers away.

This idea made the headlines in 2016 when New Jersey implemented a substantial gas tax increase making prices jump 10% or more overnight. Gas station owners were concerned that people will go somewhere else for cheaper prices or to other transportation alternatives.

While such a concern seems valid, research finds that moderate price increases are often perceived as more or less acceptable by consumers.

The case in New Jersey is less problematic for business owners as all businesses are faced with the same change. But what happens when you need to raise prices but your competition may not. Will people leave, our perception, or will they stay, quite often the reality.

First, you, the owner, must understand that it is not price alone but several factors that determine customer behavior in terms of where they shop. The first of these is how often we buy a product or service. The more often we buy something, the more likely it is that we will both recognize that the price has increased and perhaps have use considering a change.

Another factor is the cost of the item. Higher-priced items use a larger portion of our household income. This makes us, again, the more price conscious. Yet the type of item also comes into play. Sales of what might be considered vanity products will not see the drop in demand that other products might.

Price awareness also depends on how visible the price is to the consumer.  For this one, think about service stations and the billboards reflecting current prices. Price is highly visible and, because of that, we are more likely to be aware of increases, decreases and how you compare to your competitors.

Also, you must consider how other products can be interchangeable with yours. Gasoline is basically a commodity, meaning one brand is much like the next.

Things that help ensure your customers return to your store include habit. We tend to go where we have in the past.

Also, the customer thinks about the actual or perceived value of your brand. We all go to places where we like the service, the store, how we are treated, the feeling we get our money’s worth, etc. And we will continue to go back even though prices may not be as cheap as the store next door or the several stores we drive by to get to our favorite location.

Finally, there may be factors such as a desire to shop local or support small businesses can influence one’s reaction to a price increase.

All of these factors make it difficult to fully anticipate consumer reaction to price changes. And the good news is knowing price increases can be implemented.

So what can you do to make price adjustments less likely to send customers away?

• First, know why you are doing it and, when asked, have your thoughts gathered as to why you needed to make adjustments.
• Second, don’t surprise people especially if the increase will be significant in either dollars or percentages. Some owners even take advantage of it with a sale to encourage early buying. That can be a good idea but realize it will definitely impact your cash flow.
• Third, make regular adjustments. When people know you change your prices on a regular basis, the changes have less of an impact.
• Fourth, understand your own profit margins and what the data is telling you. Know what you need and how changes may affect your cash flow and revenue picture. This knowledge allows you to consider how, and even if, you implement a change.

As a small business owner, it’s important you not fear making a price adjustment. Pricing, it is said, is part science and part art. Mostly it’s knowing your customer.

Photo (CC) by Ben Ostrowsky, on Flickr

Have you ever bought something only to find out that the final prices is more, and sometimes a great deal more, than what you read or were told? How did it make you feel?

That feeling is the same one your customer gets if you aren’t being transparent in your pricing.

When I have discussed this with business owners, I sometimes have been told that all of the business costs were included and that the additional amount was associated fees or charges that were included by some other entity.

Yet the consumers I have asked and the research I have read suggest that people want to know the full cost with EVERYTHING included. Sometimes customers are offered information of a percentage that will be charged for a certain fee. That’s good but a dollar figure is what is preferred.

Our feeling of satisfaction with a purchase is not based on the advertised or listed price. It’s based on what we pay at the counter. When asked, many people can’t tell you what the price even is. But they can tell you what they paid.

Just think of the last survey you received that asked if you were pleased with the price you paid. What number came to mind? For most people, it is that final figure.

Business owners often admit being nervous about scaring customers off or being concerned that offering this information makes it hard to look competitive. Yet some have used it as a marketing tool, encouraging customers to ask the competitors to ask about “the rest of the story.”

It’s a tough decision. You need to look and sound competitive, yet satisfied customers are your business. Satisfied customers are also your ambassadors in getting the message out regarding your pricing policy and full disclosure.

This is a management and marketing area where you just don’t follow the crowd. Take time to ask and listen to your customer.

Transparency and full disclosure in pricing works. Think about how it fits in your business.

Pricing (CC) Ben Ostrowsky, on Flickr

The words “price” and “right” might make you think about the game show “The Price is Right.” However as a business owner, you know, or soon will figure out, that pricing is not a game.

The landscape of closed businesses are littered with businesses that failed to get their pricing strategy right. Some owners realized their mistake but did not correct quickly enough or sufficiently. Others just did not pick up on the signs that they were headed for trouble.

Business owners often realize they have pricing issues at one of two times. The first is when the checkbook is empty. The second is during tax time and they have nothing set aside to pay the tax bill for the year.

For some businesses, pricing issues do not show up quickly if they are using other sources of income, such as their family, to bolster the firm’s coffers. Typically, business owners in this situation think that the business will turn a profit in time.

Often, business owners do little planning to set the best price point, or one that gets the maximum return, for the business. A good pricing strategy requires thoughtful consideration. Some questions you need to answer are:
• Who are the clients you want to attract?
• What is the image you want to display?
• Who are your competitors and how will they respond to various price points you might set?
• Are you dealing with a commodity good or a premium good?
• Can you distinguish yourself from the competition?

In answering these questions, you should keep in mind four primary pricing strategies that business owners often use:

• The first strategy is called “lowest price.” The advantage to this method is it is clear to the customer. However, the disadvantages are pretty substantial. First and foremost, customers in most cases are driven by factors other than price. Price may get someone in the door one time, but without a clear benefit, people probably will go back to business owners with whom they have a longstanding relationship. People switch for better products, services or customer service, not cost.

• The second strategy is pricing based on costs-plus. This involves calculating the cost to make your product, then adding a flat amount or a percentage for overhead and profit. This should avoid the problem of underpricing so that you run out of cash. But it doesn’t take the competition into account. It also does not take into account that you may have a premium product, offer an experience or provide another value-added element for which people will pay.

• A third method, related to the cost-plus method, is using standard industry markups. Industry markups should help ensure you make a profit, but they don’t look at how competitive you might be. Related to this strategy is using a return-on-investment approach. Some of the same negatives mentioned before also would apply here because it ignores the competition. You want a return that covers not only your labor but your intellectual capital and the risk you are taking, and provides some level of a return on your investment.

• The last approach is value-based pricing. It basically is a combination of the other methods, along with an understanding of where your product sits, in the customer’s eyes, in terms of a scale from being a commodity to being top of the line. The approach is meant to maximize your return.

Maximizing your return may mean your pricing is not the highest or the lowest. It is that which adds the most to your bottom line in the long term. The biggest difficulty is understanding what your advantage is and having the ability to maintain it.

Pricing is part science and part art. Getting it right is hard, but getting it wrong means a waste of your time and money, and perhaps the end of your opportunity.