Your costs are up 24.6% since 2020. Your prices are not. Here is how to fix that.
Australian small business costs have risen 24.6% since March 2020, and they are on track to hit 27.1% by the end of this year. Insurance is up 51.7%. Interest payments are up 36.3%. Wages are up 20.3%.
Now think about what your prices have done in the same six years.
How much should I raise my prices?
Start with what the increase is worth rather than what feels comfortable. On a business turning over $1.5M, a 3% price rise is $31,500 a year, and because your costs do not change when you charge more, almost all of it lands on the bottom line.
For a business making $90,000 of net profit, that single decision is a 35% increase in profit. Made once, in an afternoon, with no new customers, no new staff and no new equipment.
That is why increasing prices is the first of the twelve profit levers, and why it is nearly always the largest line in the report.
Why is price the most powerful lever you have?
Because every other way of finding $31,500 costs you something to get it.
| Raise Prices 3% | Win the Same $31,500 in New Work | |
|---|---|---|
| Extra revenue needed | None | About $500,000 at a 6% margin |
| Marketing cost | Nil | Real, and ongoing |
| Extra staff | None | Probably |
| Extra stock or equipment | None | Probably |
| Time to see the money | One invoice cycle | 12 months or more |
| Extra work for you | An afternoon | A year |
llustrative, based on a $1.5M business at a 6% net margin.
Look at the right-hand column. To make the same money by growth, you would need to add half a million dollars of revenue, which for most businesses at this size means a materially bigger operation. The left column takes an afternoon.
I have to say, when I put this table in front of owners, the reaction is usually silence.
What actually happens when you raise prices?
Three things, and none of them are the thing you are afraid of.
Most people do not notice. A 3% to 5% rise on a service they value is invisible to a customer who is not buying on price. You have noticed every price rise in your own life that was over about 15%. You did not notice the ones under 5%.
A few will mention it. Usually the ones who mention everything. They will say something, and then they will keep buying, and in six weeks nobody will bring it up again.
A very small number will leave. And here is the part worth sitting with. The customers who leave over 3% are, almost every time, the ones who were already costing you the most. They negotiate hardest, pay slowest, ask for the most and complain first. Research consistently finds 30% to 50% of customers are unprofitable once you count what it costs to serve them, and there is a heavy overlap between that group and the people who walk over a small increase.
Losing a customer who was costing you money is not a loss. It is a decision you have been putting off, made for you.
How to actually do it
1. Work out the number before you work out the message. Do the arithmetic first. Decide on 4% or 7% based on your costs and your margin, not on what you think you can get away with.
2. Give notice. Thirty days is plenty. Surprises damage relationships. Notice does not.
3. Raise everyone, not just new customers. Two-tier pricing feels safer and it is a trap. You end up with your longest and most loyal customers paying the least, which is exactly backwards, and it gets harder to fix every year you leave it.
4. Explain once, briefly, and do not apologise. One short paragraph. State it, do not justify it at length. The longer the explanation, the more it reads like an invitation to negotiate.
5. Change something visible at the same time. New reporting, faster response times, a small improvement to how you deliver. It does not have to be big. It has to be noticeable.
6. Hold the line for 60 days. Someone will push. If you fold for the first person who pushes, you have not raised your prices, you have introduced a discount for people who complain.
What to actually say
Keep it to five sentences. Something like this.
From 1 October our prices are increasing by 4%. Our costs have risen considerably over the past three years and we have absorbed most of it, but we have reached the point where a small adjustment is necessary to keep delivering the standard you expect. Your new rate will be $X. Everything else stays the same, and we are also introducing [the visible improvement]. Thank you for your business, and please call me if you would like to talk it through.
No apology. No paragraph about difficult market conditions. No hedging.
When not to raise prices
If your delivery is currently poor, fix that first. A price rise on a service that is letting people down turns a quality problem into a quality problem plus a trust problem, and you will lose good customers rather than bad ones.
If you have raised prices in the last three months, wait. Twice in a quarter reads as chaos rather than confidence.
And if you genuinely do not know your margins by product or customer, work that out first. Raising everything by the same percentage when one line is at 45% and another is at 9% is a blunt instrument. It will help, and a sharper version would help more.
Example: the week after I took over
When we bought Aquaduck the ticket was $36. The week after I took over, I moved it to $38.
Not after a quarter of analysis. Not after a customer survey. The week after, because the price had not kept up with what the experience was actually worth and I could see it on day one.
Nobody left. Nobody wrote to complain about the two dollars. What happened instead is that every single passenger from that week onwards was worth more to the business, and that change compounded quietly underneath everything else we did. Net profit per passenger eventually went up 200%.
I have to admit the $2 felt enormous at the time. It was 5.6%. It was also the easiest money the business made that year, and I had to do nothing to earn it except decide.
The lesson I took from it is that the fear is nearly always bigger than the consequence, and that the cost of waiting is a real number. If I had spent six months getting comfortable with it first, that is six months of passengers at the old price, and I would never have seen the money.
In conclusion
A 3% rise on $1.5M is $31,500, and nearly all of it is profit.
To make the same money through growth you would need roughly $500,000 of new revenue.
Most customers will not notice. A few will mention it. The ones who leave are usually the ones costing you money.
Give notice, raise everyone, explain once, do not apologise, and hold for 60 days.
Fix your delivery before you raise your price, not after.
If you want to know what the right number is for your business rather than a general 3%, that is exactly what a Business Analysis calculates, along with eleven other levers.
Call me at 0491 729 043, or book a conversation at sarahcolgate.com.au.