What’s A Business To Do When Times Are Bad? Raise Prices, Of Course

If you’re feeling the heat of the current economic malaise, revenue is down, profits are down, and you’re down. But I’ll bet you have a plan. You’ll work harder. Incentivize your employees. Sell more. Everything will be fine. 

So you’ll implement your plan. And then, months later, you’ll reassess. Measure. And bingo, everything will be fine. Right?

Right. Unless of course, it isn’t. What if you’ve tried “everything” and business is still headed south? Profits are still down? And now, employees are irritable and wondering about the future? What went wrong? 

Well, it’s possible that you weren’t thinking outside the ‘ol box. Hard work is not always the cure for what ails a business. Sometimes adjusting prices—upward—may be the best course to correct a ship’s bottom line. Especially if, unbeknownst to you, your business model is lacking. If you’re implementing the old ‘work harder, cut costs’ model, you may be helping... but not nearly enough. And you may be simply prolonging the inevitable slide that takes over 70% of small businesses past the point of no return, on the way toward bankruptcy. 

Pretend for a moment that you’re a cabinetmaker and it costs you $400 to create a cabinet that you sell for $800. Sell 5 cabinets and your gross profit is $2,000 (5 cabinets x $400 margin). Now, if business is suffering and you’re not selling as many units as before, you decide to raise your price per unit to $900. This may scare some customers away, say 1 out of 5. So, while your sales would drop to $3,200, your production costs also drops to $1,600 as you also save on variable costs like credit-card fees and freight, and delivery.

But who’s to say that a minor price increase is going to scare off customers? Especially if your business enjoys a loyal customer base? They know you and trust your work, and they often refer business to you. They, or the people they refer to you, could very easily shrug off the minor increase and you could be selling 5 or more cabinets, making you profitable.

Now, there is no guarantee that raising prices will save an ailing business, but if a struggling business keeps doing things the way its always done them, they’re likely to fail anyway. At least the price adjustment gives them a shot.