Every business owner understands the importance of generating enough profit to stay afloat. But how do you know if you are charging enough for your products and/or services? Pricing is just as much an art as it is a science, and there are several different variables that go into deciding how much to charge for a certain offering.
There are many businesses out there that could charge more for what they are selling, but they are hesitant to do so. Usually, this is either because they think that increasing their prices will drive away customers/clients, or they might believe that they would be charging too much if they bumped up the prices, and it would not be fair to their customers. Sometimes, it is a combination of these two factors.
Table of Contents
- How to Determine Your Pricing
- More Net Revenue = A Higher Net Worth
- Thinking About Selling Your Business? Contact a Local Business Intermediary
How to Determine Your Pricing
When determining your pricing, it is important to understand that you deserve to be appropriately compensated for the product or service you are providing to consumers. After all, starting and operating a business takes a lot of hard work, and it involves a lot of risk on the part of the owner.
You may have heard the statistic that most small business startups end up closing within five years. If you have beaten those odds and you are still in business, you must be delivering something that is valuable to your target market.
We are not suggesting a dramatic price increase, but we are suggesting that it is worth examining whether you might be able to bump it up at least a marginal amount. Even a 1% increase in your pricing can make a significant impact on your bottom line, because that entire 1% is added to your net revenue.
For example, if you are a restaurant that brings in $100,000 in revenue each month and you bump your prices up by 1%, this would add $1,000 per month to your bottom line. What could you do with an extra $1000? Put it toward the lease on your building? Give your employees a raise? Maybe some extra marketing is required to bring in more customers?
As you can see, there are several ways that even a small price increase can make your business stronger. And in the long run, this is better for consumers because your business will be more stable and more likely to be around serving them for several more years.
In the current economic environment, customers are a lot more likely to be accepting of a price increase as well. They know that many businesses were hurt badly by Covid-19, and they need to recover their losses. They also know that inflation has driven up the cost of almost everything, so they will not be all that surprised if you need to increase your prices or fees in response.
There are even ways to generate more revenue for your business without technically increasing prices. One strategy that a growing number of businesses are using these days is to add a surcharge to purchases that are made by credit card. The average business pays about 2% to 3% of the price of a transaction when the customer uses a credit card; and it is now legal in most states to put a surcharge on credit card transactions to recover this cost.
Going back to the example of a business that does $100,000 in revenue each month, if only half of their revenue comes in through credit card purchases (and that is a pretty conservative estimate these days), this would be $50,000 per month. Assuming the business is paying processing fees for credit cards around 2.5%, by passing this fee along to the customer, they would generate an additional $1,250 in revenue each month.
More Net Revenue = A Higher Net Worth
One often overlooked advantage to increasing prices and generating more net revenue is that the value of the business increases. Again, drawing from the previous example, if your business implemented a surcharge on credit card transactions and increased profits by $1,250 each month, this would be an additional $15,000 added to your bottom line each year.
Business valuations are often based (at least partially) on a multiple of net revenue, with this multiple varying depending on the industry. Assuming a multiple of 3.5 X net earnings (which is standard), that $15,000 in revenue would increase the value of your business by $52,500. This is something to seriously consider if you are looking into a price increase or another revenue generation strategy.
Thinking About Selling Your Business? Contact a Local Business Intermediary
It is a seller’s market right now for businesses in most industries. If you have been considering selling your business soon, it is helpful to work with a reputable CPA and accounting practice broker.
Business intermediaries work closely with sellers to help them maximize the value of their business, so they can receive a good price for the years of hard work they have put in. They also handle the business listing, screening prospective buyers, confidentiality agreements, and other complicated tasks that go into a successful business sale.