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Should I Raise My Prices or Lower -Them?

by SatishYadav

posted in Business

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One of the realities of business is that the cost of getting new customers is normally much higher than the cost of improving the value of your offering to existing customers.

Advertising is expensive, and good sales channels demand a big piece of the profits. If you are just starting out then you have very little choice and must put your focus on acquiring new customers. If you already have a good sized customer base, you might want to spend a little more time trying to get the most out of the customers you already have.

Many businesses put a lot of focus on increasing the number of customers and neglect to put in the appropriate effort on another important sales growth method: Increasing the average value of each sale.

There are three management techniques to increase the average value of each sale and in turn increase sales revenue:

1. Raise the price

2. Up-Sell

3. Cross-Sell

Today we're going to focus on raising the price to increase the average value of each sale.

The Supply Demand Curve

If you raise the price two things will normally happen. First you will make more money from each sale. Second, you will make fewer sales. So should you raise the price or not?

In theory, the decision whether or not to raise price comes from an understanding of the supply demand curve for your market. Simply put, supply is how much of something is available, and demand is how much of something people want. Generally speaking, the more people want something, the more the price goes up because sellers know they can get more money for it. The other side of the equation is that the lower the price, the more people will be able to buy it. The optimum price to be selling at for maximum profitability is where the supply and demand curves cross.

So what does this mean in practical terms? I know I don’t have a graph of the supply demand curve for my markets pinned on the wall. Most of us will never have that level of detail available.

What it means is that you need to test your pricing once in a while. If you find that you are always out of something then bump up the price until you are not. If you have a room full of something else that you can’t seem to get rid of, drop the price. It’s not doing you any good stored in the back room. If you can’t make a profit on it, then at least get some of your money back and move on with different products or services. You need to keep track item by item what is selling and what is not. Push the price on the top sellers up, and bring the price of the bottom sellers down.

Increasing the average value of each sale is an effective way to increase your revenue numbers without the need to get new customers. While raising your prices can result in fewer sales, there is a balance to be struck between the number of sales and the value of each sale. You need to track profitability item by item in order to optimize the amount of money you make from each one.

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