From the September 2000 issue of Startups

Do you rely on low prices to lure customers? Are you undercutting the competition? Discounting your products or services? The strategy may be effective in launching a new business, but it could lead to problems once you're established. You can't afford to operate too long with prices that are unrealistically low. When it's time to raise prices, follow these steps:

1. Consider all your costs of doing business, including utilities, supplies, fringe benefits and your salary. How much would your time and knowledge command if you were working the same number of hours for someone else every week? (You may not be able to afford to hire yourself, but at least you'll have a target to shoot for.) Then include such items as insurance (business, health, auto), car expenses, telephone bills, taxes, equipment, repairs, travel and all other business-related overhead reflected in your meticulous records. (You do keep meticulous records, don't you?)

2. If your expenses exceed your gross income, it's time to raise prices or fees. By how much? Find out what competitors charge. Call anonymously and ask. Solicit pricing information from trade associations. Survey your customers or the public. When you come up with a price range, peg your charges somewhere in the middle-where most customers are. Don't be too expensive or too cheap; consumers avoid both extremes.

3. A client-based business might introduce higher fees to new and prospective clients first; few will balk. Over the next several months, inform all clients of the new rates. If you serve customers, raise prices on a limited number of products initially, then edge prices up gradually across the board.

4. Continue to monitor and adjust pricing as operating expenses rise, as the market fluctuates or as your business changes. Be certain that prices reflect new investments that may contribute to the quality of products or services. Have you upgraded equipment? Improved technology? Hired experts? Consider those factors in your pricing as well.

5. Finally, consider the economy in general and your market in particular. Is the market strong? Are your clients prospering? Is there a general state of contentment and prosperity? If so, they can probably afford a price hike and won't give it a second thought. On the other hand, if your prices are already competitive, the competition is holding back on price increases or the economy is in bad shape, you may want to delay any hikes. Should customers resist increases, ease up a bit. But do not penalize yourself by charging unrealistically low prices.


Paul DeCeglie (MrWritePDC@aol.com) is a former staff reporter for Journal of Commerce and American Banker.