Can You Raise Prices?
Written by CMG News Contributor, Doug Carleton
Do you sell a high-quality product? Or does your business have a reputation for exceptional service? How would you describe the demand for your product? Elastic? Inelastic? In its very simplest terms, elastic demand refers to products that fluctuate in sales if prices change. For example, the price goes up, so people buy less. Down, then people buy more. That is price elasticity. Inelastic demand, on the other hand, occurs when the demand for a product doesn’t change as much as the price. Here are some factors that can lead to inelastic demand:
Limited or no substitutes. For example, if you have a car, there is no alternative (yet) to buying gas. So even if gasoline prices take a dramatic jump, you’re still going to have to buy gas. So the seller of gas can raise prices with minimal effect on demand.
Limited competition. Is there minimum competition for your product? Or do you sell a product that has a high barrier to entry for a competitor to get into the market for example, or any other reasons?
Bought infrequently. If you sell a product that people don’t frequently buy, it may not be as sensitive to price changes.
Short-run. In the short-run, demand for your product may be somewhat inelastic. It takes time for consumers to look for alternatives, although it has been happening more and more during the pandemic. As people spend more time shopping on the internet, they have the opportunity to look at other similar products without having to drive around looking for other alternatives. But if your product has limited substitutes or competition, you could be in very good shape coming out of the pandemic. Consumers have not been able to find any or many satisfactory alternatives which could give you more price flexibility.
So if you sell a product for which demand is somewhat inelastic, how long has it been since you raised your prices? Many, many lives ago, I was a specialist in bed and breakfast financing. One of the absolute hardest things to do was to try to convince innkeepers who could raise their room rates even a small amount. They were often afraid that if they did, they would lose business even if they had a beautiful house in a beautiful location that people wanted to stay in as long as the price wasn’t far out of line with other lodging alternatives. Practically any increase in room rates would go almost totally to their bottom lines, but the fear of being too expensive that they would lose business was a powerful hindrance.
So what about your product? Does it have a reputation or place in the market that could make people want to buy it anyway if the price was a little higher? How much of a price increase would go to your bottom line?
This blog entry is a slightly edited excerpt from Doug Carleton's 'The Daily Life Of A Small Business Owner' series. Doug was a mentor with SCORE, Startup Virginia, and Lighthouse Labs, and has 25+ years of experience in small business finance including 12 years in SBA lending. To contact Doug directly, please email him at firstname.lastname@example.org.