Price increases are usually subtle over time, mainly due to inflation. If you are not annually reviewing and increasing prices, you will likely see margins decrease. Usually, you can increase your prices up to 7% annually before most customers notice or complain. However, this varies by industry.
ADP is saying that they delayed pricing increases due to COVID, but since economic indicators show a positive recovery, they are now increasing charges about $3 per pay period. Fannie Mae and Freddie Mac are charging an additional “Adverse Market Refinance Fee” of 0.5% starting September 1, 2020. Restaurants have started raising prices to compensate for the limits of capacity in seating.
As a fractional CFO, Pricing is a key component to ensure a company keeps its margins at profitable levels. You would be surprised how much a 5% price adjustment can make a big difference. If you haven’t reviewed your prices in years, you could be 10% or more below the competition, and that goes directly to the bottom line.
Why a Pricing Review is Important?
Your costs are changing all the time. Employees get paid more each year, and materials go up due to inflation. The economy, government policies, taxes, and competition all play a factor in pricing. It is common to see large businesses increase prices on an annual basis, and customers are used to it. I have found that it can be a good sales tactic to close a deal. You can tell a prospect that prices are changing next month/year, and that will give them a sense of urgency.
Over time, products and services can become less profitable than others. By understanding more specifically, your customer, service, and product margins, you can watch this more closely. You may even find that you are losing money on a particular service or product line. The easiest step to improve margins is to increase prices if you can. I would also recommend looking for ways to be more productive or improve buying patterns. It is best to increase prices and lower your costs, which will be a huge boost to the bottom line.
How to Review Your Prices?
Recently with a client, we went through each product and service and put together an estimate of costs. There was a disparity in margins, but this is not good enough. We are now reviewing the actual line items by service line to get more insight into profitability. Some customer jobs are more profitable than others, and we want to use the data to know why. If a company has set up their accounting correctly, they can eventually run reports in a way to see how they are doing by customer, service, or product.
Once you have numbers to back up the margins, it will be important to get the right personnel together to discuss the strategy going forward. If you are losing money on a certain service, customer, or product, you can do one of three things.
- Increase the Price
- Lower the cost – Efficiencies, Buying, Hiring, Acquisition
- Drop the Service or Product
Pricing Red Flags
I recommend all businesses to have current financials updated and reviewed with a CFO. You can see trends in your margins that will alert you if something is wrong. From there, make sure you set up your reporting so you can quickly see profitability in the way that makes the most sense for your company. If you have this set up correctly, you can then know monthly how your Gross Margin is between customer, service line, or product. Compare your margins to the prior year, budget, and forecast to see if you are improving. Good accounting, a monthly financial review, and forecasting will show you trends so you can make changes more quickly. You don’t want to lose out on six months of profit because you were behind or didn’t have the reporting you need.
Over the coming months, as the economy picks up, you will see price increases, and you need to be ready to adjust to the changing economy. By having these types of reports, you can better manage your margins and cash flow. You will have more control over your profit – which has to be a good feeling for any business owner. But all of this is only possible if you get a good fractional CFO to help you.