| FORTUNE Small Business: | |
Profits down? Time for a price hike
Think you can't raise your prices while the economy is in a recession? Think again.
(FORTUNE Small Business) -- Dear FSB: We're electricians who are extremely busy with home renovations and commercial jobs. Yet our profits are minimal. What's the best way to calculate our markup? I've attached sales, cost-of-goods, and total-expense figures for your review. What am I doing wrong?
- Gary Peters, President
Peters Electric, Inc.
Kenoza Lake, N.Y.
Dear Gary: We won't print your numbers, but they certainly show a pattern of strong sales and puny profits.
The percentage of gross profit that any firm should aim for differs by industry. Verne Harnish, head of Gazelles, a small-business consulting firm in Ashburn, Va., suggests seeking guidance from your banker. Banks have access to data compiled by the Risk Management Association, such as average gross margin ratios for various industries, which they use to gauge loan applicants' creditworthiness.
Armed with the relevant figures, Harnish suspects you'll find that your margins are way below those of others in your industry.
"You seem to be practically giving your work away," he says. "Lots of small-business owners do this. It's partly a self-esteem issue."
How can you fix it? Raise your prices (See "Gentlemen (and Ladies), Raise Your Prices!", October 2007).
"Customers are never surprised when you raise prices," says Harnish. "In fact, if the price is too low, it might even make them doubt the quality."
The first resistance may come from your own salesforce, Harnish adds. Make sure they are true sellers, and not just order-takers.
"Are they rushing to close the sale at any price, or are they really explaining your value proposition - whether it's quality, service, or speed?" You may have to help them devise a sales pitch that highlights why your work is worth more than you currently charge.
Harnish knows that businesses often hesitate to rock the boat in a shaky economy. His advice: Do it anyway.
"I raised my prices 25% during the 2001 recession," he says. "Nobody blinked." 
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