Should you raise or lower your prices in 2021?
Setting the right price for your products and services is mission critical to the success of your business. What you charge your customers has a major impact on your company’s finances, profitability, future prospects and public image.
It’s understandable that many companies look at pricing in the context of cost versus profit. In a simple pricing equation, you may be inclined to look at how much it costs you to make a product or offer a service, and therefore decide a price based on a reasonable profit margin.
However, there are actually many more variables that you need to consider when deciding on a pricing strategy. Those other variables are important to understand, particularly during recessions or difficult economic circumstances, because even though changing your pricing could improve profitability, it could have other long term, unintended consequences.
Business expert Katherine Paine, founder of the Delahaye Group, explains that “The moment you make a mistake in pricing, you’re eating into your reputation or your profits.”
The implication of Paine’s point is that a change in pricing doesn’t just affect your profit margin, it can also have a profound impact on your company’s reputation. Your company’s reputation is how your business is perceived. Changes to public perception of your company can cause long term damage to your brand in different ways.
For example, reducing your prices may increase your sales figures, and therefore your profitability. However, price reductions can lead to a perception that your products or services are no longer as valuable or high quality. This in turn leads customers to expect a lower price in the future.
If you start off with a price that’s too low, customers also tend to be unwilling to pay more later on. If you start off with a price that’s too high, sales numbers may drop to unsustainable levels, or customers may expect more than they’re actually getting, giving your company a poor reputation for meeting expectations.
Profit margins can change at short notice, and can vary depending on the time of year and other external factors. A brief look at the events of 2020 shows how quickly a profit can turn to a loss, or a loss can turn to a profit, based on circumstances.
Company reputations tend to last a lot longer. How customers perceive you, your brand and your value go on long after changing your prices. This means that how you change your prices could affect your long term goals.
If you feel the need to reduce your prices during times of economic hardships, a better option may be to look at selective, temporary discounts. For example, a short window where lower prices are available for new customers.
If you need to consider raising your prices, you’ll need to understand that this will have a major impact on how existing and prospective customers see your services. Price rises could lead to competitors offering lower quotes to undercut you, or could see your company seen as too expensive.
As always in business, research is fundamental. Research your competitors’ products, market trends, and how people perceive your business. When you make any adjustments to your prices, use this research to ensure that you can see how a change in price will affect your company’s long term prospects.
Remember, a price change may be temporary, but its reputational impact will often last much longer.