Time to Raise Prices? To keep up with rising energy and benefit costs, more small businesses are raising prices. What it means for you.
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If you've been swallowing the rising costs of doingbusiness, watching as soaring energy prices and exorbitanthealth-care expenses choke your already-gasping profit margins,you're not alone. Many entrepreneurs have been waiting andwatching for cues from their industries and larger retailers andmanufacturers to see whether the variable price increases wouldactually stick.
It appears they will. The Consumer Price Index, put out by theDepartment of Labor, rose steadily before flattening out, as oilprices leveled off heading into summer. This indicates that as longas oil and health-care costs continue to rise or stay level,companies are finally committing to increased prices. And smalloutfits, which often lag behind larger ones, are gettingcomfortable with the idea of following suit. "A growing numberof businesses are intending to or have already raised prices,"says Stuart Hoffman, chief economist at PNC Financial inPittsburgh, which conducts regular surveys of small and midsizebusinesses. In the company's February survey, 50 percent ofrespondents said they expected to raise prices. That figure grew 16percent over fall 2004 and more than doubled over the previousyear. "It's a sign of these businesses flexing theirpricing muscle," says Hoffman.
In some cases, they have to. Tony Zanoni, president andco-founder of Kitchens Direct, a home-remodeling company inSarasota, Florida, has felt the pain of increasing energy costs.The rise in the price of gas cards he provides employees, theincreased cost of the 50 to 100 deliveries the company makes alongthe Gulf Coast each week, and climbing freight expenses have allmade their mark on his company. "It's hit us from everydirection," says Zanoni, 39. "And there's nocertainty to it. That's the most frustrating part." Thatuncertainty has made it difficult for Zanoni's team to bid onfuture projects with accuracy. "Without knowing the costs offuel and freight, you're kind of throwing darts in thedark."
But Zanoni finds he can only raise clients' prices once ayear, or twice at most, so he's had to hunt for operationalefficiency opportunities inside the company to make up thedifference. "It's a double-edged sword," he says."If I raise too high, they'll go look for someone else,but too low, and I give up profit I could have earned."
For smaller businesses, that fine line between underpricing andscaring customers into the arms of competitors feels even narrower.That's why experts advise against simply reacting to theoverall business climate and instead suggest businesses do someresearch before making a price change. For starters, suggests JoelEvans, co-author of Retail Management: A Strategic Approachand the RMI Distinguished Professor of Business at HofstraUniversity's Zarb School of Business in Hempstead, New York,entrepreneurs should track their sales and customer retention, andthen look at the pricing activities of similarly sized companies intheir geographical area-while being mildly alert to what largerfirms are doing. Do this "not to match them, but to beconsistent with your strategy," says Evans, noting thatsmaller companies can become overly preoccupied with matching bigcompetitors' prices. "Yes, you need to be within theballpark-10 percent or 15 percent-but you don't need to bematching," he explains.
And rather than lag behind large competitors' priceincreases, use your research to lead when necessary."Sometimes the large retailers can actually postpone a priceincrease based on their large inventories purchased at a lowerprice," says Larry Compeau, associate professor at theClarksonUniversity School of Business in Potsdam, New York, who studiesthe impact pricing has on consumer behavior.
Ultimately, it's important to recognize that price isn'tthe only reason customers choose your product or service, and ifyou've remained competitive at 10 percent to 20 percent aboveprices of the nearest large retailer, you should maintain that sameratio, says Compeau. "Consumers value what you'reproviding and are willing to pay a premium for it," he says,"so by not increasing your price, you're simply leavingmoney on the table."
C.J. Prince is executive editor of CEO Magazine.