As a small business raising prices during bad economic times comes with great risk. If you raise prices, you risk losing clients to competitors. If you don’t, decreasing revenue or rising costs can capsize your company. So what’s a small business supposed to do?

The Art of Pricing

Raising (and, sometimes, even lowering) prices can be a balancing act. As with any major business decision, pricing should take into account various factors. Here are several to consider.

Analyze Costs

First, you need to carefully analyze the costs needed to bring your products or services to the market. Such expenses might include raw materials, storage, personnel, advertising, delivery, rent, equipment, taxes and insurance. Failure to cover all these costs in your price will inevitably lead to shrinking profits.

Establish a Profit Margin

Next, it’s important to establish an acceptable profit margin. This is where the art of pricing begins. To find your company’s sweet spot with regards to pricing, consider researching competitors in your region to determine their pricing for comparable products, raising your finger to the wind to discern the business climate and asking your customers about their preferences.

Listen to Your Customers

Your customers will tell you if you raised prices too high. They’ll either continue to buy your product or seek out a competitor.

Consider Incremental Price Increases

Small, incremental price increases tend to be more palatable to customers than a few large changes. We see this every day in the rising cost of gasoline, utilities and taxes. Many customers can handle incremental inflation…just don’t shock them with a huge increase all at once.

When considering pricing, it’s important to take a long, hard look at both your costs and the quality of your products and services. Customers will generally pay a premium for goods and services that provide greater value. Successful business owners endeavor to increase both the actual quality of their products and the perception of that quality in the minds of customers. Do both well, and a price increase may be in order.