When Should Your Company Raise Prices? 4 Things to Help You Decide

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When you run your own small business, there’s a lot to consider when setting prices. Take a look at what to keep in mind before charging more. 

Inflation has been a major economic problem since the economy opened up after the COVID-19 lockdowns, with prices surging to record highs and wreaking havoc on people’s bank accounts. But there’s evidence that suggests inflation is cooling now, with the latest report from the Labor Department showing prices are only up about 3% year-over-year (which is close to the Federal Reserve’s target inflation rate of 2%).

As a small business owner, you’ve likely dealt with some challenging economic conditions in recent years. Making choices for your business under these conditions can be difficult — especially when you’re trying to make the decision about whether to raise prices.

Before you decide to increase the amount you’re charging for goods and services, here are four key questions to ask yourself.

1. Has your cost of goods and services gone up?

As a business owner, you obviously have to pay for goods and services that are necessary for your operations. Depending on the kind of company you’re running, this could mean paying for things like raw materials, accounting services, sales representatives, products you resell, and more.

If the cost of your goods and services has gone up, this will reduce the potential profits you can make. You’ll likely want to raise your prices accordingly so you don’t reduce the amount your business earns.

2. Are you happy with your profit margin?

If you are currently making enough profit on the products you sell, you may not want to raise your prices. If you are making enough that your company is thriving, why take the risk of a price increase that could cause you to lose customers and potentially see your total income decline?

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3. What are your competitors charging?

Your competitor’s prices play a role in what you can charge — especially if you have price-conscious consumers as your target clientele or if you offer a product or service that is similar to what others provide.

If you are the only company offering something or a top-notch in-demand expert in your field, you may be able to get away with charging a lot more than your competitors do — especially if there are high barriers to entry that can prevent others from joining your industry. But if that’s not the case for you, you don’t want to raise your prices if doing so would put you far above what your competition is charging.

4. What will the market bear?

Finally, you have to think about what your potential customers can actually afford. If you raise your prices too high, you may price people out, and they won’t buy your products or services even if they would otherwise want to and even if there are no competitors.

Your company goals may also play a role in whether you want to raise costs, as you may be focused on maximizing your potential profits and want to raise prices if you can get away with it. Or you may prefer to keep costs reasonable even if you think you could get away with charging more.

By considering these issues, you can make an informed choice about whether raising prices is a good idea or not. Ultimately, though, you need to weigh all the pros and cons, as a change in price could make a big impact on your customer base and on your company’s ultimate success or failure.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Christy Bieber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.

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