Lead Article (Self-help topic – PUT YOUR PRICES UP)

The beginning of a new financial year brings with it a range of emotions. There can be satisfaction of a successful previous twelve months – or disappointment that targets were missed. It can bring hope of a strong financial performance in the upcoming year or possibly some trepidation that some new strategies and plans may not work as well as planned. One item that seems to constantly appear on the radar for many businesses I deal with is fear of customer dissatisfaction due to price increases. Every businessperson knows that the cost of running a business is constantly increasing. Wages, electricity, insurance, fuel…the list goes on. Business expenses are constantly being pushed up. To run a successful and sustainable business, not only must you ensure that these increased expenses are being covered, but you should also look to increase your profits above those from the previous year so your profits continue to increase.

One of the largest mistakes I commonly see in an otherwise successful business is when a business fails to increase its prices on an annual basis. No matter how tough the economic climate, you need to make sure you are at least keeping track with inflation. A small increase to match inflation each year is not unreasonable and clients will accept that. When times are good, a larger increase to try and grow the business further is logical.

Many businesses are scared that their clients will leave them as soon as they put their prices up. There are a few points to make here. If your service is exceptional and your clients are very satisfied, a reasonable price increase will be readily accepted. Clients care about service much more than they care about price. If your clients leave in droves when you increase your prices by just the level of inflation, then there are some other serious issues within your business and the price increase didn’t cause the problem, the price increase only highlighted the problem. Perhaps it was better that this problem was highlighted early when you still have the possibility of fixing it. Lastly, if you don’t put your prices up each year, you eventually have to put your prices up dramatically as a “catch-up”. I have made that mistake and I can guarantee you that it is much easier to explain a three per cent rate increase each year than it is to tell the client all the logical reasons you are putting your prices up by twenty per cent because you haven’t had a price increase for five years. In fact, an annual “inflation” increase usually requires little or no explanation but the big jump needs some careful client discussions to go alongside it.

The message here is really to deliver exceptional service and charge fair and reasonable prices for it. Do not under-value the work that your firm provides and you will be able to continue to put through those annual price increases and, if you work hard at it, clients won’t even question some increase a few per cent above the inflation rate. If you can push for a five per cent increase over a few years, it will make a dramatic increase to your bottom line. As a quick comparison, a three per cent annual increase over five consecutive years is a cumulative increase of 15.9 per cent. A five per cent annual increase over five consecutive years equates to 27.6 per cent. Imagine having no price increases for five years then trying to explain a 27.6 per cent increase!

Have a great financial year and tell me the best or worst reaction you have had from a price increase at md@smallbusinessrules.com.

Science Quiz Question

I have four kids and they love to play tricks on each other. My youngest child (aged 8) came up with a brilliant trick to play on her big brother recently. She knew that ice melts. She also knew that ice floats. She worked out a devious plan whereby she would wait until her big brother was asleep and then sneak into his room. She would fill a glass up with ice and then add water until it was almost overflowing. Then she devised a device with a small cup underneath the glass and as the water overflowed it would fill the cup and, in the middle of the night when the ice melted, the water would overflow and dump water on her brother’s sleeping body. I loved her ingenious design (despite the fact that I thought I should be a little concerned about her devious mind). My question is this. Should I be concerned that her big brother is going to wake up in the middle of the night covered in water, or does my 8 year old still need to learn a little more about her physics?

Science Quiz Answer

My son was actually aware of the devious plot and he is also a good science student. He knew there was nothing to be concerned about because, despite the fact that the ice was sticking out well above the rim of the glass, the water would never overflow.

Water has that curious property of expanding when it freezes (this is very rare). For an object to float, it must be less dense than the liquid it sits in. Since water expands as it freezes, it floats. A floating object displaces an amount of water equal to its own weight. If the ice cube had a mass of 20g, say, it would rise out of the water until it displaced 20g of water. As the ice melts, it contracts and therefore requires less volume. In the morning, there is a nice glass of water sitting above my son’s bed that is filled exactly to the brim. My daughter needs to start working on her next devious plot!

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