Why you should review your prices every year
Posted on 24th January 2025
Your business grows when you increase sales but, when your costs are also increasing, your profits could still go down. That’s why it’s a good idea to review your prices every year.
In fact, if you can justify increasing your prices, even by a small amount, you could significantly increase your profits.
Price and profitability
Research shows that even a 1% increase in price could add over 11% to your profits. On the other hand, a 1% increase in sales might add just 3%.
This is because, when you increase sales you also have extra costs. This includes marketing to attract new customers and the cost of producing more products or delivering services. When you increase your prices without increasing sales, you don’t have these extra costs.
It’s still important to attract new customers because some of your existing ones will stop buying from you over time. Even when economic conditions might suggest you should reduce your prices it’s important to look carefully at the impact.
A well thought out pricing strategy helps to maintain your profitability in the long-term.
Keeping your business healthy
It’s reassuring when you can see your business profits increase and it’s also important to help keep everyting running smoothly. Cashflow is so important for small businesses, so this can really help you operate efficiently.
Depending on your business you might need enough funds to maintain stock levels or you could have long payment cycles. If you’re a manufacturer, for example, you might need money for design, materials and production before invoicing your customers. It could take months to receive your payments.
So, increasing sales is good, but a payment gap can mean you could run out of money. This is often an unrecognised cost that could put pressure on your business’s financial health. To complement your plans to serve new customers, you can consider added-value services that justify higher prices. If the price increase covers more than the additional cost your extra profits will help your business grow. You can pay for extra stock and employees and have flexibility to invest without external finance.
Planning for growth
If you can boost your business profits through increased prices you’ll have more cash to reinvest. This can support long-term growth without the extra costs of commercial finance. You can take on new employees, upgrade your technology, and improve customer service. These allowable expenses for your business also help you reduce the amount of tax you pay.
Reinvestment increases your business’s ability to produce more revenue and profits. It’s a sustainable route to future success. With the right financial reports, you can set realistic goals and keep track of your success. You might even find there are grants available to add to the money you invest.
Building your brand
As a business owner you will want to set your pricing competitively. However, there will always be someone offering lower prices. This is where the idea of ‘value’ is important. Realistic pricing tells your customers you don’t cut corners. Your experience, the quality of materials and processes and positive customer reviews can all justify your prices.
A low price might attract some customers but might also undermine the value of your business brand. In turn this could damage your margins and profitability. A higher price can attract customers who are happy to pay for quality. They are probably more likely to buy from you again and recommend you to others.
Please get in touch if you would like us to help you review your business prices, costs, cashflow and profitability.
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