Can you get away with increasing prices?

Matatus do it all the time and get away with it. How hard can increasing your prices really be? Other small business owners, in Kenya, struggle with this balance between losing customers and getting the money they need.

When business gets rough, some entrepreneurs are quick to reduce prices or give incredible discounts. I don’t complain standing on the customer side, of course. But reducing prices, more often than not, reduces revenues for your small business. You should only do it to get rid of unwanted or stagnant stock. This is because only the big businesses have the number of customers to absorb reduced prizes.

Plus it’s going to be difficult to increase your prices when we vote in a better Government and the economy gets better. We, Kenyans, like haggling about prices a lot. We won’t even turn a neck to increased prices. And I was joking, all Governments are inherently corrupt. There’s no good Government.

As difficult as it is to pull off, increasing prices has to be one of your cards on the poker table. It has the biggest positive effect on your revenues (duh, right?). McKinsey and Company find that a sh.1 increase in your price will result in an sh.11 increase in your profit. This is excellent for your cash flows and your own salary! The cost of living also goes up for entrepreneurs.

But we all know the big problem with this. You are guaranteed to lose a number of customers if you increase prices. They will either go to alternatives or do away with the purchase all together. A silly positive entrepreneur may feel that increasing prices leaves you with only those customers who can pay. I guess the loss of a customer can work out to be better than the stress of bad debt, if you think about it.

Increasing your prices

A known trick in increasing prices is distorting your customers perception of value. This way they only complain but don’t leave you – yes, like a bad relationship haha shame on you! You can include additional services with your sale. Their costs should be low or covered by the increased prices. Example? Matatus. “Pimped out” matatus in some routes literally charge more fare than the basic ones. Kenyans justify it by saying “they fill faster.” People will readily pay more for both real and perceived value.

You can experiment before you dedicate yourself to increased pricing. One way is to offer higher prices for new customers and see the response. Another way is to start dropping the low price, high variable cost products and focus on the real money makers. You may also raise your prices gradually to make it more acceptable by customers.

Also, you have to be holistic about things in business. In this case, you must consider the price ceiling. Price ceiling is used by mistaken Governments to set a maximum price for products. Like we saw with subsidized unga. For you it means knowing just how much is the limit that we’re willing to pay for your products or services.

Only you can help yourself know that fact. Why did you set your original price in the first place? Were you a new business focused on survival? Were you eyeing growth and that’s why you simply copied your competitors prices? Or you don’t want to over-extend yourself and therefore set a price to retain the customers you already have? Sorry for the paragraph full of question marks. But with the right answer you can know who pays for your stuff.

One pitfall is to be short-sighted about it. When you increase prices you will see an immediate drop in revenue. It’s inevitable as you lose customers. But you cannot panick. You have to appreciate that both old and new buyers need time to adjust their budgets to your increased prices.