The Tricky Art Of Raising Prices

Nation's Business, Feb, 1999 by Howard Scott

Howard Scott is a free-lance writer in Pembroke, Mass.

Business owners need to keep their eye on several factors in deciding when and how much to increase customer charges.

When the Florida Legislature was considering a 2 per cent environmental tax on the gross sales of dry-cleaning companies in the state, Greg Johnson opposed it. When the measure became law in 1995, however, Johnson turned it to his advantage.

Johnson, president of Quality Cleaners, a five-store firm in Gainesville, saw what he called a "golden opportunity" to turn the levy into a plus for his company. He believed that because his customers would already see increased costs from the 2 percent environmental-tax surcharge, he could raise prices even more to recoup the rest of his environmental costs.

"With my accountant, I figured out that my overall environmental costs were about 4.5 to 5 percent of volume," says Johnson, whose firm employs 40 people and grosses about $1.4 million annually. "So I decided to put the environmental charge at 6 percent. That would cover my cost, plus.

"Some dry cleaners only posted the environmental tax at the 2 percent requirement," he notes, "but we decided to be open and above-board, recovering all the environmental costs that we'd been absorbing."

How has the plan worked? Says Johnson: "Gainesville is a college town and is pretty environmentally minded. I don't think people objected to it at all. Volume has increased and profits are up."

A Delicate Balance

Raising prices can be tricky. You want to make more money, but you don't want to price yourself out of the market. You want to keep margins up, but you want to remain competitive.

So how do you raise prices without triggering a customer backlash? Most firms do it gingerly and only to sustain profit margins or to keep pace with the rising costs of materials--as Tom Slater does.

Slater is president of Snorkel Stove Co. in Seattle. The firm, which employs 10 and has $700,000 in sales annually, manufactures kits for hot tubs that are heated by a wood-burning stove--a highly efficient means of heating. The average price of the kits is $2,100.

Although Slater has little competition because his firm is one of the few in the country that make such kits, he doesn't increase his prices unless his suppliers increase theirs. 'We react to cost pressure," he says. "When costs, mainly [for] the highest-quality clear cedar from Canada, go up, we raise our prices. It's resulted in modest price increases every two or three years. Perhaps we've averaged a 3 percent annual increase.

"I have thought about determining our demand curve and perhaps quoting 10 to 15 percent overall price increases to respondents of one mailing, but I'm afraid that our business will drop dramatically

"Maybe it's the former accountant in me, but I worry that the phones will cease to ring."

Companies with extensive product lines also have a hard time raising prices. Raymond Oswalt, vice president of Dallas-based United Elchem-Arfco Industries, a glue and solvent-cement manufacturer with more than 300 products, talks about achieving consistent margins. "Weekly, I receive reports, and since we work on a cost-plus basis, I look for the margin to be in line. When [an item's] profit margin goes down, a flag goes up. We monitor it, and, if necessary, we'll increase prices. We don't ever increase our whole line--only selected items, and only when we have to.

"Finally, every year we review profits and make any margin adjustments if necessary. That's the way we've been able to stay in business since 1968 and employ 45 people."

At some companies, foreign competition keeps a lid on price increases. Tom Plotkin, president of Comfy/Inter-American Sheepskins, Inc., an eight-employee West Los Angeles, Calif., company that manufactures, imports, and distributes seat covers and other sheepskin products, says: "Chinese tannery entrepreneurs have created a huge [U.S.] importing business. So with this influx of new competition, we've been reluctant to raise prices. We've only raised three times in the last five years, and that was minimally.

"The only place we'll freely raise prices is where we produce seat covers that need alteration through our special expertise in cutting and sizing. We get our full margin there."

In The Eye Of The Beholder

There are reasons other than profit margins and the cost of materials to raise prices. When customers perceive that the value of a company's products has increased, raising prices becomes easier, says Alan Weiss, president of Summit Consulting Group in East Greenwich, R.I. Weiss has helped many small firms arrive at their price structures.

"It's easier to change price if there is a perceived change in value," says Weiss. "If the owner could add something to the product--an extended warranty, better materials, more durability, a user-friendly feature, a higher level of service--he'd be more apt to raise prices."

Weiss continues: "The irony of pricing is that people pay vastly different amounts for essentially the same product. Someone will pay $13,000 for a new [compact car] while someone else will pay $45,000 for a [luxury car]."