6 Methods to Nibble Your Method to Greater Costs
I’ve written before about the exponential impact price increases can have on your profits and bottom line. The challenge is that inflation has been low for several decades. This makes it difficult for companies to drive price increases for their products and services.
When inflation was rising at a rate of 12 percent, no one blinked when you increased your prices 13-14 percent because everyone understood that costs were rising at a similar rate. However, in today’s low-inflation era, customers expect companies to find ways to increase productivity and offset cost increases. In fact, many customers are now expecting prices to fall.
So if you are looking for ways to increase your prices we need to look for other strategies that you can potentially use to ask for higher prices.
1. Eliminate something for nothing.
Take a close look at your business and see where you might have areas of giving away free services that you might be able to charge. I remember in a shop I ran we offered to recalibrate our machines for free. But that was also a business that third-party laboratories were charging for. Once we made the switch and started charging for that service, it turned into a highly profitable, million dollar revenue generator for a service we were already doing for free. As another example, consider how airlines have mastered this art. It doesn’t cost them $ 50 to change a ticket, nor does it cost them $ 50 to check your bags. Finding a way to charge for these services, which used to be free, has become an effective way for airlines to pass a price increase on to their customers. Some reports indicate that airlines made most of their profits from pre-Covid fees. It is worth looking to see if there is a potential for you to do something similar in your company.
2. Use escalators.
Another way to pass on a price increase is to play the long game of escalators. This is a lesson real estate learned long ago. Just take a look at a commercial real estate lease. Every lease contains an escalator clause that increases the price every year after the base year, usually by 2 to 3 percent. But most people spend so much time negotiating this upfront price that they forget how that price will go up over time. For example, I rent some space for a CrossFit gym that I own. When I signed my lease, it was $ 35 per square foot. That’s now increased to $ 45. I don’t even know if this is at market price anymore, but it’s what I have to pay because it’s part of the lease I signed.
3. Expand your product.
One of the ingenious ways that the famous General Electric company raised prices over the years was by building new revenue streams around its core products. For example, when GE was selling jet engines, the company also began offering service contracts and spare parts for its engines. The company also offered training and financing as an additional service, all of which were billed. These services, which some companies may find free of charge, ended up being more profitable for GE than the core product itself.
4. Offer warranties.
Another way to increase your prices slightly is to offer a guarantee, which is basically an insurance policy that you offer your customers against future defects. They can be very profitable for a reliable product. The advantage you have as a manufacturer is that you understand the quality of your product and know when it actually needs servicing. Think about the last time you bought something from, say, Best Buy. After purchasing your new large screen TV, the company will first ask if you would like the extended warranty with it. It’s noteworthy how many people say yes, as guarantees make up the vast majority of Best Buy’s profits today.
5. Offer financing.
Another way to get additional prices and profits is to give your customers the option to fund or buy the product over time. This can work in your favor if, for example, you can borrow money at 2 to 3 percent and lend it to your customers at 7 or 8 percent to make paying for a product easier over time.
Another strategy to nibble at higher prices is to find ways to bundle your products, which will give you more opportunities to sell higher margin items. For example, if you buy a camera from Amazon, you will also find that “other customers are also buying items,” B. a case, an additional memory card or a tripod. Even if you offer a discount on the package, you will increase sales and profits by giving the customer the incentive to buy the high-margin accessories.
So keep in mind that price increases are an incredibly powerful way of generating profits for your business. However, if you’re struggling to convince your customers that it’s time to raise prices, then don’t launch a full frontal attack. Instead, use some of the nibbling strategies outlined above to increase your bottom line.
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.