Pricing & Profitability: The Importance of Proper Bookkeeping
As prices continue to rise, you’ve likely noticed that your cost of doing business has increased as well.
With that in mind, you may be considering raising your prices. After all, the main point of any business is to make money, and you can’t do that if you’re no longer breaking even.
Read on to discover some tips on how to determine if a price increase is required, and how to communicate this to your customers.
Monitor the health of your business
Understand what is costing you more.
It is important to regularly track and analyze your profitability. Check which products or services are making money, and which aren’t. Then take it a step further and pinpoint the breakeven position for each area.
You will then be able to decide how much more you need to make to be profitable. Evaluate all avenues – pricing, supplies, bills, rent and utilities, training, etc. By doing this regularly, you’ll see which areas cost you more over time and may perhaps be bringing down your overall profitability. Those areas that cost you more will likely benefit from a potential price increase (or review of input costs from suppliers).
HOWEVER, before you can come to any potential conclusions…or even start your analysis for that matter…you need to have your bookkeeping records up to date and accurate. The go to bookkeeping software we recommend to our clients is Xero. This platform allows us to keep our clients’ books up to date on a monthly basis and allows them to access this information online from virtually anywhere.
Decide your approach
If costs have gone up across the board, a blanket increase would make sense. However, if you find that only some of your services now cost more to operate, it might be a good idea to increase only those prices. Your customers will appreciate only the necessary cost increases being passed on.
Being able to allocate costs to specific revenue streams and determine the profitability of each area is the key step here. This is where online bookkeeping software, like Xero, can help.
Being aware of what others in your market are charging for similar services is critical information as well. You want to ensure you are operating profitably, but don’t want to price yourself out of the market.
Accept that you have to do it
It’s a daunting task to consider raising your prices, as the danger of upsetting customers who might not understand the reasoning behind the increase will be front of mind.
But the bottom line is this: you cannot deliver quality service if you’re not charging enough and as a result not operating profitably. It’s that simple.
If you’re spinning your wheels trying to make up the difference, you won’t be able to deliver the great service you’re known for if you’re constantly overworked trying to find profits elsewhere by taking on more unprofitable work.
Raising your prices is part of doing business. It doesn’t make good financial sense to try to swallow the cost to appease your customers. With that in mind, know that you’re doing the right thing both for yourself and your clients.
Gauge the satisfaction level of your current customers and look for areas to improve
If you know that your clients are happy and believe they’re being provided great value, they’re going to be happy to continue paying for that and should understand where you are coming from. They won’t bat an eye when you inform them of your increase, assuming the increase is justified.
But, if they’re not currently satisfied, a price increase will simply upset them. This is where open communication with your clients is important to ensure they are getting the service or goods they need and at a price that accurately reflects the value being delivered. Understanding a customer’s pain points and finding a solution to this will show you care and help generate more value for them.
Open discussions with your clients will provide valuable feedback to you as well in terms of areas you can improve upon with service delivery or goods being offered. Determining what your customers value most may help shed some light on where you should be focusing your time and resources.
Give a lot of warning
Three months before your planned increase, contact your client base to let them know of your plans. State the reasons for raising your prices now and explain the logic behind it.
Explain the fact that this change is necessary to continue delivering the high-quality service that they’re used to. Giving enough notice to your clients so they have time to react and prepare shows you respect them.
Send a personal message or call long-time clients, or ones that hold significant accounts. This shows them that you care about their reaction, and gives you a chance to listen to their concerns.
Keep the communication lines clear
Most clients will be fine with your price increase and will understand your reasoning. Some will likely have questions, concerns, or even complaints. Focus on answering their questions.
This isn’t a hard sell – it’s a discussion.
It’s a great idea to provide options as well to ensure the optimal value is being provided to your customers. For example, you could offer to keep their prices the same, but trim the services included for that price or change the offering altogether to better align with their changing needs. This is the perfect opportunity to discuss and plan ahead.
Remember, if you’re already in regular contact with your clients, the conversation around rising prices (to cover rising costs) will be a lot less awkward.
Once you’ve done your research and informed everyone, go ahead confidently with your price increase. By doing so, you’ll be able to continue providing the excellent service your clients are used to.
Monitoring your costs and overall profitability on a regular basis is critical to the continued success of your business. However, as mentioned above, in order to monitor the health of your business effectively, it is critical your bookkeeping is up to date. We generally recommend completing internal reporting on a monthly basis. This will give you a live snapshot of where your operations stand throughout the year, rather than trying to pull everything together once a year at tax time. Simply put, the more time that passes, the less valuable the reporting becomes!
If you would like assistance analyzing your pricing / profitability and coming up with a plan, reach out and we’d be happy to chat about the different services and packages we offer.