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Planning a Price Increase – Know Your Tipping Point

  • Posted by Judy Reynolds 23 Jun
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Planning a Price Increase – Know Your Tipping Point

Why would you increase your sales price?

  1. You have been under valuing what you do for too long, and the price no longer covers costs;
  2. You want to decrease the number of clients and have a strategy to price buyers out of your market;
  3. You have added extra value to the product or service offering;
  4. Production costs have increased;
  5. Building a brand around exclusivity;
  6. You need to increase profit; or
  7. A myriad of other possible reasons.

In all cases, it is important that you know your numbers before you embark on a plan to increase prices.

Before adopting a strategy to increase prices you must examine your numbers to fully understand how much sales could decrease before it impacted on your gross profit position in dollar terms.  This is your tipping point – the point at which the new sales volume does not generate an increase in gross profit.

Consider this scenario. 

If your current Gross Profit % is 35% and you increase prices by 10%, your sales could fall by 22% without eroding your Gross Profit.  Your tipping point is 22%.

With this knowledge, you can ask yourself – am I confident that a 10% price increase will not cause sales to fall by more than 22%?

This is important because anything more than a 22% decrease in sales will result in an erosion of gross profit.

Of course it is possible that sales volumes will increase as a result of a price increase due to market perception of value – a belief that a higher price translates to higher value to the buyer.  Even if that is your expectation, it is good practice to know when margins will be impacted just in case the market doesn’t respond as you expect.

Download our free Pricing Increase Matrix and find your own tipping point.

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