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Increase prices now to avoid margin squeeze, says expert

Small businesses should be increasing their prices now to avoid margin squeeze or risk seeing their profit margins further eroded, according to leading micro and small business expert, Dr Greg Chapman.

Aussie DollarDr Chapman, who teaches business at the University of Melbourne, is a Telstra Business Awards judge and Australian Institute of Management presenter, says that while inflation has been low recently, small businesses have been absorbing a range of other significantly increased charges for several years.

“They have attempted to increase their revenue through sales and discounting but now their profit margins are under stress and they have little choice but to increase their prices,” Dr Chapman says. “The problem is that a high percentage of small businesses are too afraid to increase their prices because of a concern their customers will desert them, but their fears are generally unfounded.”

Dr Chapman says that with the right strategies, businesses can raise their prices by 10%, 20% or even higher and still retain their customers.

“There are many strategies you can use to increase your profit, such as increasing enquiries and increasing the number of times someone buys, but there’s something special about price. It’s the one strategy businesses are most afraid to use, because if you increase your prices you might lose the sale. That’s a pity because price is such a terrific strategy. If you increase your prices by 10% you can potentially double your net profit, depending on how profitable your business is.”

Dr Chapman, who has just released his latest book Price: How You Can Charge More Without Losing Sales, says that to achieve a significant and sustainable price increase business owners must be able to defend their price.

“If you want to increase your prices, you must change at least some elements of your marketing,” he says. “You need to find customers who are reassured by your price. For your best buyers, price is not their highest consideration. You must understand your points of difference and communicate the value of those points of difference to your best buyers.”

Dr Chapman says one of the biggest psychological barriers is the connection between price and the cost of delivery of a service or a product, and owners must break this connection to achieve significant price increases.

“Many hard-working business owners work long, back-breaking, hours servicing clients, sorting orders, and taking care of all the gruelling nitty-gritty ‘stuff’ without making a decent profit at the end of the week.

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Paul Hayman

Paul Hayman

Paul is a staff writer for Dynamic Business online.

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