Raising your selling prices will increase sales when your product or service has an inelastic demand curve i.e. when you raise prices and there is minimal or no change in volume sold. This is a profitable strategy when higher prices produce greater gross profits due to increased profit per unit, even if volume has fallen.
Additional benefits of increasing prices include:
- Raising your prices can move you to a more upmarket clientele.
- Allows you to distinguish yourself from your competition.
- Increases the perception of quality so can actually lead to increased sales volumes (in some cases).
- Eliminates low quality price sensitive customers.
- Allows you to sustain your desired profit margins.
- Price increases may position your product or service as a 'premium product'.
Factors to consider:
- Determine whether your product or service has an inelastic demand curve - there is no point increasing your selling prices if it results in a substantial decrease in volume sold.
- Find out what your competitors are offering and their current pricing.
- Determine your objective in increasing prices - i.e. to increase sales, increase gross profits, increase the perception of quality, etc.
- Calculate the financial effect of higher prices and lower volumes on your gross profit and net profit.
- Increasing selling prices often requires the business to increase their service levels at the same time.
- Consider the effect of increasing prices on business reputation, brand quality, and credibility.
- Limit the initial selling price increase to 10%, and monitor the effect on sales, gross profits, and net profit.