How to Know When to Raise Prices?
When small business owners get busy, the default response is usually to add capacity. More employees, more equipment and/or more space. Yet, there is an alternative. Raise prices. It is a simple, yet often overlooked option. If you are a business owner, did you raise prices in the last 12 months?
Raise Prices – A Forgotten Choice
In short, raising prices has become a forgotten choice. Trades, professions, and even entire industries can also be forgotten. Throughout the Iron Age and Middle Ages, blacksmithing was an important craft. Tools, weapons and other iron wares were produced…one by one…by the strong arm of the blacksmith.
Upon the advent of the Industrial Revolution, machines replaced strong arms. They could turn out the same item, but faster and more uniform. And most important…cheaper. In short order, the machinist replaced the blacksmith.
There are still a few blacksmiths around today. Instead of making weapons and tools, they make architectural and ornamental iron works. Gates. Railings. Hooks. Even decorative leaves. Some are for new construction. Some are replacement pieces. All are expensive. The custom work of a skilled craftsman comes at a price.
If you have been to a state fair or a historical re-enactment attraction, you have likely seen a blacksmith in action. Heating the iron. Hammering it. Bending it to his will.
At our state fair, we had the pleasure of meeting a blacksmith. He was demonstrating his craft to anyone who stopped by his stall. It’s hard not to stop. The hot coals. The rhythmic clang of the hammer. The orange glow of the searing hot iron. And the beauty of turning an ugly iron bar into a work of art. Not something you see every day.
With a few questions, we discovered some interesting things about this man. This was no weekend warrior or part-time blacksmith. He was (and is) a full-time commercial blacksmith. With employees and paying customers. In other words, a real business.
He explained in some detail how his business works. He classifies projects by the time they take to complete. There are only two types. Small jobs and big jobs. Small jobs take 3 weeks or less to complete. Big jobs take longer than 3 weeks.
“How Busy Are You”
At that point, he mentioned how he was looking for new apprentices on account of how busy he was. And how hard it was to get young people interested in such an old profession. Young folks are interested in new technology. And the technology of the blacksmith is about as old as it gets.
“Well how busy are you?”, we asked, expecting the usual answers that come from small business owners. I’m working 60 hours a week. I’m months behind schedule. Typical responses. But what he said truly shocked us.
He said, “On the small jobs, the waiting list is 8 to 12 months. On the big jobs, the waiting list is 9 years.” 9 years! Needless to say, we were blown away. Apparently, he and his employees are so good at what they do, customers are willing to wait that long. It reminded us of the restaurant in upstate New York where one has to book their table 5 years in advance.
To us, this is a clear example of a time to raise prices. Most owners default to increasing capacity. Hiring another employee. Buying equipment. Leasing more space. Of course, these “solutions” often add significant upfront costs. And, in the short term, it can actually decrease your capacity. New employees need to be trained. New equipment needs to be procured and installed. Adding space is always disruptive…especially if it involves moving…which it typically does.
The simplest (and usually best) solution is to raise prices. Yet few owners seem to consider this as a viable option. If the blacksmith raised his price enough to lower his waiting list to one or two years, he would still be just as busy. But he would be making a lot more money with no additional risk.
Don’t get me wrong. We are not saying that small business owners should never grow their customer base. Or add capacity. But understand this…when you add capacity, you add costs. Some you count on. Others you don’t see coming. These costs can outweigh the additional sales you add. When this happens, you can actually make less bottom line profit.
So the next time you think about “growing” the business, give equal consideration to raising prices. It just might be the better option.
photo credit: <a href=”https://www.flickr.com/photos/opedal/6038590979/”>Dag Endre Opedal</a> via <a href=”http://photopin.com”>photopin</a> <a href=”http://creativecommons.org/licenses/by-nc-nd/2.0/”>cc</a>