Traditional economic theory until about a century ago held that when you increased prices, demand for your product or service would automatically decrease. In other words, price increases led to fewer purchases 100% of the time.
This changed late in the last century when a couple of Economics Professors came up with the concept of Demand Elasticity. It proved that when you increase prices, sometimes demand for your product or service will decrease and sometimes it won’t.
Let’s use a couple of examples to explain.
In our first example, you own a gas station. Everyone around you sells a gallon of unleaded for $5 per gallon. You increase your price 100% to $10 per gallon.
Does that decrease your sales by 100%? Probably not. Someone will run out of gas right in front of your station and need to buy a gallon or two to get to another station to fill up.
But this is an example where increasing your prices 100% will lead to an almost similar decrease in purchases.
In our second example you’re a defense attorney. You charge $300 per hour and a $30,000 retainer on all of your cases.
The last five cases you defended were high profile, all over the news cases where you got obviously guilty drug dealers off on technicalities. You’re the next Johnny Cockran.
If you increase your prices 100%, how much will demand for your services decrease? Probably not much, if at all.
This is an example where you would be a fool not to increase your prices. You would do just as much work and double your income.
In other words, depending on the product or service, we shouldn’t always be afraid to increase our prices.
Let me leave you with this.
Those two examples are extremes. Most of us find ourselves somewhere in the middle.
If you have a homogenous product or service where there is little or no differentiation between you and your competitors, it’s much more difficult to raise prices. In a situation like this, you should “shop” your competitors often.
Go to their stores. Call their offices. Stalk their websites. See what they actually charge for similar products or services.
Don’t be the last one to raise your prices. All of your competitors have the same pressures you are experiencing. In these difficult times, those price increases are a necessity.
Conversely, if you have a heterogeneous product or service, it’s easier to differentiate yourself from a competitor. You may not have any “true” competitors at all.
This is where a pricing increase would lead to a smaller decrease in demand. If a 10% increase in prices will only lead to a 1% or 2% decrease in purchases, then what choice do you have?
Getting through inflationary economies is all about surviving with what you already have intact. It’s even better if you can increase the size of your business when your competitors go out of business.
But you still need to be around to pick up those clients who find themselves without a home. Protecting your businesses and your margins is what it’s all about.
We’re all going to get through this. Let’s get through it together.
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