Raising and Lowering Prices
Q: Pricing has always been an issue for me. How do I know when to raise or lower my prices?
A: Setting your prices too high or too low is a common problem for entrepreneurs. Set them too high, and you can lose customers to the competition. Set them too low, and your profit margin will suffer.
Pricing takes into account a number of factors, including market conditions, the target customer and the entrepreneur's own intuition. Many entre-preneurs arrive at their pricing by measuring their costs and then adding a percentage (25 percent, for example) on top. This percentage, or profit margin, is where the trouble lies.
New entrepreneurs usually start by pricing lower than the competition to gain some traction in the marketplace, but their prices can stay too low for too long. It might be time to increase prices if your competitors all charge more than you do, your profit margin is steadily shrinking due to rising operating costs, or the business doesn't have enough capital to expand even though the customer base has grown. If you're fearful about your customers' reactions to a price increase, remember that small, incremental increases are generally easier for them to accept. There are even ways to increase prices without looking like you're raising them, like ending the use of discounts, coupons and product samples. Rest assured that most customers will stick with you if they find value in your product or service.
Many people will advise against lowering prices because your company will give up too much margin. One situation where you may want to lower your prices is if you're losing valued customers who say you've gotten too expensive. Depending on your product, you may be able to improve your profit margin instead by lowering your overhead and operating costs--such as by renegotiating the prices your suppliers charge.
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