Raising prices

In short

A friend of mine runs a small bakery, and for two years she sold her bread at the same price. She was afraid her neighbors would grumble. You have probably felt that same knot in your stomach when you look at a price tag you wrote long ago. Start by finding out what one unit of what you sell truly costs you, counting your own time. Then decide what profit you want on each sale, and work out the price that gets you there. Tell your customers plainly and kindly, and give them a little notice. Watch what happens for a month or two, then adjust. Your work has value. Charging for it fairly is not greedy.

The whole of it

What it is

I once watched a man at a county fair sell lemonade for the same fifty cents all summer, even as lemons and sugar crept up in price. By August he was working hard and going home with almost nothing. He was a good man with a good product, and he was slowly paying customers to drink his lemonade. Raising prices is simply the act of changing what you charge so that your business can pay its costs, pay you, and still have something left for a rainy day. It is not a trick, and it is not a sign that you have stopped caring about the people who buy from you.

Many owners feel awkward about it. That is a decent instinct, because it comes from respect for the folks who trust you. But respect goes both ways. If the business cannot pay its bills, it cannot serve anyone for long. A fair price keeps your doors open and keeps your promise to your customers.

How it works

If you are holding a set of prices that has not changed in a while, here is the plain logic. Every sale has to cover two kinds of cost. The first kind is what it takes to make or deliver the thing, such as flour, fabric, parts, or an hour of your labor. The second kind is what it takes to keep the lights on, such as rent, insurance, software, and tax. What is left after both is your profit. If your costs rise and your price does not, your profit shrinks, and there is no other way for it to go.

Then there is a bit of arithmetic that surprises people. Say you want to keep the same profit after your costs rise. A small price increase often does more than you would expect, because the extra money lands straight in your pocket rather than being eaten by costs. On the other hand, a customer who leaves over a higher price takes their whole purchase with them. So you weigh both. You ask how much extra you make per sale, and how many sales you could lose before the higher price stops paying off.

A helpful way to look at it is the break even point on volume. If you raise a price and your profit per sale goes up, you can lose some customers and still come out ahead. You can do that math before you ever change a sign, and doing it will steady your nerves.

The numbers, and where to find yours

Some of your numbers come from your own books. Your cost per unit, your monthly overhead, and your current profit on each sale are all sitting in your records. If you keep no records yet, this is a fine reason to start. A simple spreadsheet or a notebook will do.

A few numbers come from outside your shop. If you sell goods, you may owe sales tax, and the rate depends on your state and sometimes your city. Your state revenue department publishes those rates. If you are self employed, you also pay self employment tax on your net earnings, and the rate is the current figure, which the official source publishes each year. The IRS explains how it works in its publication for self employed people, and you can find the current details on IRS.gov. If you sell across state lines, the rules for collecting tax can differ, so check with the revenue department in each state where you have customers.

Inflation figures can help too, since they show how prices in general have moved. The Bureau of Labor Statistics publishes the Consumer Price Index on its website. Do not treat that number as your own cost of doing business, though. Your suppliers may have raised prices by more or less. Your own invoices tell the truest story.

A worked example

Let me tell you about Marisol, who makes hand poured candles and sells them at craft markets and online. She charges 18 dollars a candle. For a long time that felt fine. Then she sat down one Sunday with her receipts and did the honest math.

Each candle costs her 4 dollars for wax, 1 dollar for the wick and jar, and 1 dollar for the label and packing. That is 6 dollars in direct costs. Her monthly overhead is 600 dollars for her booth fees, website, and supplies she shares across all candles. She sells about 120 candles a month. So her overhead per candle is 600 divided by 120, which is 5 dollars. Her total cost per candle is 6 plus 5, or 11 dollars. At 18 dollars, she keeps 7 dollars on each one. Across 120 candles, that is 7 times 120, or 840 dollars a month before tax and before she pays herself.

That felt thin for the hours she puts in. She decided a 20 dollar price was fair. At 20 dollars, she keeps 9 dollars per candle. If she still sells 120, she keeps 9 times 120, or 1,080 dollars a month. That is 240 dollars more.

Now she asks the careful question. How many customers could she lose and still make the same 840 dollars? Her profit per candle at the new price is 9 dollars. She divides 840 by 9 and gets about 93 candles. So she could sell as few as 93 candles a month at 20 dollars and earn what she earns today at 120. That is a drop of 27 candles, or a little over a fifth of her sales, before she is worse off. Knowing that gave her the courage. She raised the price, told her regulars with a warm note, and watched. Her sales dipped a little the first month and then settled. She slept better.

Where it goes wrong

The most common slip is doing nothing. A price that never moves quietly loses ground every year. A second slip is raising prices with no word to anyone. Your steady customers feel ambushed, and a little notice and a kind explanation go a long way. A third is guessing at costs instead of counting them. Many owners forget to count their own time, and then they wonder why a busy business feels poor.

Some owners raise prices all at once by a big jump, then panic and cut them back. That teaches customers that your prices are negotiable. It is usually gentler to make a modest change, hold steady, and review later. Others compare themselves only to the cheapest competitor. You do not have to be the cheapest. You have to be worth what you charge. Think about what your customers really value, whether that is quality, speed, trust, or care, and let your price reflect it.

Last, watch for one trap in the math. A higher price only helps if you keep enough customers, so always check the break even figure like Marisol did. Numbers on paper are a guide, not a promise. Real people decide, and you will learn from what they do.

Questions to answer before you leave this page

Do you know what one unit of your product or service costs you, including your own time? Have you added up your monthly overhead and divided it across what you sell? What profit per sale would make this work feel worthwhile? How many sales could you lose at a higher price before you end up worse off? Which customers deserve a personal note before the change, and what would you like to say to them? What tax rules apply where you sell, and have you checked them with your state revenue department or the IRS? And when will you look at the results, so that you can adjust with a clear head rather than a worried one?