Business Plan Center

Four signs you need to adjust prices

Your business's pricing strategies should evolve as your business grows.

Once you've decided on a pricing structure, you might be reluctant to change it for fear of losing market share and scaring away customers.

But your pricing strategy should evolve as long as you're in business. As market conditions change, you'll need to adjust your prices, especially if you set them low to penetrate the market initially. The trick is to know when to change your pricing strategies.

Here are four signs that you need to raise or lower your prices.

1. Changes in the economy or market

External factors beyond your control will sometimes force you to adjust pricing to stay competitive and meet your business goals. Economic conditions like inflation, a recession, and interest rates can impact your production costs, which affect your margins and in turn can impact your pricing approach.

A change in demand is the most obvious sign that your pricing may need to change. People spend less during recessions, for example, which may require you to cut prices temporarily in order to keep demand constant — especially if your product or service is perceived as a luxury.

If demand for your products and services increases significantly, you might need to add additional equipment, hire additional employees, or find a larger workspace. You could raise prices to help cover these costs.

2. Your production costs decrease

Over time, you may discover ways to reduce the cost of doing business — and therefore have the option to pass those savings on to your customers by lowering prices. The costs of doing business can include:

  • Material costs

  • Paying wages, salaries, and benefits

  • Rent

  • Insurance

  • Marketing

  • Transportation

If you maintain prices, you can keep the extra money as part of your gross margin of sales and net profit margin. If you lower prices, you can build goodwill with your current customers and attract new ones.

Think this decision through carefully. If production costs increase again, you may need to raise prices again, which could irritate customers and damage your brand.  

3. Your competitors' prices change

If one or more of your competitors lowers their prices, you might need to do the same to stay competitive.

If you keep your prices the same, identify the added value your product or service has, and make it clear to customers in your marketing. Many people are willing to pay for better quality and value, but you have to tell them how you're superior to lower-priced competitors. For example, you could advertise a free sample item with a purchase or improve your customer service by sending a "thank you" email to customers after a transaction.

4. Rising production costs

Sometimes your ledger reveals when it's time to adjust pricing — for example, when sales increase but profits don't.

Rising production costs are often the cause: If your materials cost more, your profit margin shrinks. Adding staff or extending business hours can also increase your expenses.

Before you raise prices to compensate, try to cut down on your production costs. For example, you might shop around for more affordable suppliers or rework schedules to reduce overtime.

Make the most of your pricing strategies

Monitoring and adjusting pricing is critical to your ongoing success and profitability. Make sure your business doesn't end up paying the price by tracking your sales carefully, researching your competitors, and staying on top of industry and economic trends.

Get more tips on optimizing your pricing strategy.