Raising Prices Doesn’t Guarantee Increased Profitability
If you’re trying to increase your business profits (and who isn’t?), you might think the sure-fire way to do that is simply to raise your prices. If your customers pay more, you’ll make more. Right? Not necessarily.
Well, if you’re using the Profit First method, raising prices will indeed equate to increased Profit. Because you take in revenue, you immediately pay yourself a profit. So if you take in more revenue (by raising your prices), you’ll pay yourself more profit. But increased revenue does not necessarily mean increased profitability.
Profitability vs. More Profits
And what is profitability exactly? It’s a measure of your profit relative to your expenses. It’s an assessment that helps you determine if your business can sustain itself and grow. Ultimately you want to be able to project the profitability of your business well into the future.
Here’s why raising your prices does not automatically equate to increased profitability.
You do have to raise your prices from time to time no matter what because of inflation. The cost of doing business is always gradually increasing because the costs of goods and services in our economy are generally rising over time.
So if you raise prices just enough to keep up with the cost of doing business, you might not increase your profitability at all. So how do you increase profitability?
There are endless tactics and factors of influence. (Here are just a few ideas specifically for gym owners.)
But at the most basic level when we’re talking about profitability, raising prices alone won’t cut it. You have to raise your prices and you also have to monitor your expenses.
How to Plan a Pricing Increase
Price increase strategy incorporates many factors. Ideally, you have a system in place for reviewing your client pricing structure on a regular basis. This involves running reports and examining numbers that are very specific to your business and its service offerings. Read about one fitness studio owner’s successful formula for profitable pricing here.
But let’s say you’re leaving your pricing structure in place for now because it’s working well. How much should you raise your prices, even if just to stay even with current expenses?
I’m always a proponent for increasing your prices regularly by small amounts rather than implementing larger increases less often. It’s easier for clients to stomach.
At minimum, we suggest increasing your prices by 1 to 2% annually to account for an inevitable increase in the cost of something or other. But a 3 to 5% increase is very standard.
Your landlord might raise the rent, or the cost of your CRM software monthly subscription might go up—or both. You might be able to predict how much your vendors will raise their prices this year by reviewing the history of previous years.
And then consider whether you need to upgrade to a higher tier of an existing expense, or purchase something new altogether this year. You’ll need to factor that into your spending plan, and possibly your pricing increase, if you haven’t saved ahead to pay for it.
You should examine your full roster of expenses at least quarterly, and definitely whenever you’re thinking about implementing a pricing increase. We talked about analyzing your recurring business expenses and how to reduce them in this earlier post. Trim whatever you can. This is a step toward increased profitability.
Along with that, you should look at any other areas where you may have inefficiencies in your business. Are you running a tight ship with your team members for maximum productivity? Trim here too, if necessary. Labor inefficiency is an enemy of profitability.
Raise Prices to Achieve Broader Goals
Now you’re aware that you need to increase prices incrementally on a regular basis just to keep up with rising costs. Of course, it’d be great if you also could strategically raise prices to help you achieve your broader business goals.
For example, do you have a goal to pay yourself more every month? You can use a pricing increase to take an incremental step toward that. Work backwards with the numbers. Do you know what your revenue needs to be in order to increase your Owner’s Pay by as much as you want to? Figure out how much you need to increase incoming revenue per client in order to make that incremental step.
Overall, determine an increase that you are comfortable selling to your clients. Are you confident that a $10 increase in their monthly membership fee is worth it for them?
Part of raising rates and your journey toward increased profitability might also involve changing your business model to add more value to their membership. If your goal is to have a higher market share (more clients), then you’ll naturally need to scale your business over time to accommodate them.
Having a higher market share also makes you a more competitive business, and this alone can improve profitability.
And stay tuned for next week’s post, where we’ll offer some best practices for how to tell your clients that prices are going up!