URL: http://www.entrepreneur.com/money/moneymanagement/pricing/article66010.html

The decision to raise or lower prices is a tough one, with many ramifications for your business. But the decision whether or not to change prices is not as important as the decision about how to accomplish the change. To put it another way, two companies who change prices on the same products by the same amount may get widely different results depending on how they implement the new policy.

Raising and lowering prices effectively involves careful attention to timing. It requires knowing how to affect your customers' perception of the value inherent in what you are selling. It forces you to study and accurately predict reactions from your competitors.

Deciding How Much to Change Prices
Sometimes businesses announce major price hikes, even doubling their previous rates. One theory is that a single large price hike will get the pain over with. Businesses may also announce large price hikes when they've experienced major increases in the price of a key ingredient or cost component. A company that is being overwhelmed by sales volume from an unexpectedly popular product may jack up prices to reduce demand to a manageable level.

However, most price hikes are done in stages on the theory that customers will be accustomed to higher prices over time and be willing to tolerate them as they become more loyal. A series of smaller hikes may not even be noticed by customers who would be seriously put off by a single large one.

If you have more than one product, consider raising prices on some items while leaving the others the same, or even lowering them. Some customers are sensitive to the slightest price hikes for a particular item while mostly ignoring other increases. Automobile dealers use this fact to their advantage by cutting prices on cars as low as possible and attempting to make much of their profit on accessories like fancy paint jobs, about which customers are less price-sensitive.

Picking the Right Time
If you decide to raise or lower prices, you must pick the right time. If you're lowering prices, choose a time when the change will have the most impact; if you're raising prices, choose a time when you'll encounter the least resistance. Your business's seasonality, growth stage and sales cycle affect your choice.

Many retailers, for example, raise prices seasonally, usually in the fall when Christmas is near and rushed shoppers pay less heed to prices. A brand-new store early in its growth stage might delay a price hike, however, in a bid to gain market share. Meanwhile, a computer store catering to businesses is likely to ignore the holidays and time prices changes to coincide with new model introductions, which are more important to its sales cycle.

It may be tempting to put off raising prices until after a busy season ends. After all, higher volume may make up for lower per-unit revenues. Gouging should never be a part of your price-raising strategy. But the time to raise prices is when your product or service is in demand.

Changing Value and Price
Prices don't exist in a vacuum. Like the earth under your feet, a price is supported by the value the customer perceives in the product or service to which the price is attached. Thinking about price and value in this way makes it clear that this is at least a two-dimensional problem. That is, you can change the pricing and leave the value alone, or you can change the value and leave the pricing alone. You can also change both value and pricing or leave them both alone. Any one of these changes can be tailored to have the same impact on your bottom line, at least on an individual unit basis, but they may have vastly different effects as perceived by customers.

An example of changing the price without changing the value is when a grocery store holds a sale on a popular consumer item. A case of Coca-Cola is a well-recognized commodity; shoppers have a firm idea of what a dozen cans of Coke are worth. If a retailer charges less than that amount, shoppers will be attracted. Charge more and shoppers will be repelled, all other things being equal.

Many businesses change value without changing price. For instance, cans of ground coffee have slowly shrunk from 1 pound to around 13 ounces. This has allowed coffee makers to maintain the perception of holding prices steady or even reducing them, while they are in reality increasing the per-ounce charge for ground coffee. Shoppers who notice such shenanigans may resent them. But if a competitor makes a value change, many companies feel they have to follow suit or be perceived as high in cost.

You can complicate the picture by changing both value and price simultaneously. For instance, a grocer could raise prices on Cokes but include a free insulated can holder with every purchase of two or more cases. Changing value and price simultaneously may confuse customers, so it's a good idea to figure out which element is most important—the value of the can holder or the extra prices on Cokes, to continue the example—and stress that in promoting the offering to the marketplace.

Many businesses get the best long-term results from increasing price and value. Others find that they can cut their own costs while increasing value and thereby offer an almost irresistible proposition to customers—a powerful recipe for growth, indeed. But the key lesson about value and price is that these elements can be adjusted to move demand and increase sales without changing what it actually costs you to make a product. Careful attention to what happens when you move pricing and value points can show you the way to pain-free, profitable growth.

Excerpted from Growing Your Business