Changing prices

Businesses may raise or lower their price for several reasons, and each change affects demand, revenue and profit, so the decision needs thinking through.

Reasons to put the price up

• Costs have risen. If materials, wages or fuel cost more, each sale leaves less profit, so a higher price restores the gap between revenue and costs.
• The brand is strong or the product has improved. Customers who trust a brand, or who can see better quality, are often willing to pay more, so the business can charge extra without losing many sales.
• To raise revenue and profit. Selling a similar number of units at a higher price brings in more revenue, and if costs stay the same, profit rises too. This only works while customers will still buy.

For example, a mobile pet-grooming van charges £30 a groom. Fuel and shampoo costs then climb by £2 per appointment, squeezing the margin, so the owner raises the price to £32 to protect it. Regular customers who book every month accept the change because they value the convenience.

Reasons to put the price down

A lower price can attract new customers and increase demand, so the business sells a larger sales volume. But each sale now brings in less revenue per unit, and if costs per unit stay the same, the profit margin on every item shrinks. Total profit only improves if the extra units sold more than make up for the smaller margin.

Take a Saturday art club charging £12 a session with 40 children, bringing in £480. At £10 it needs 48 children just to bring in the same revenue. If materials cost £5 a child, the margin per place drops from £7 to £5, so even with 48 children profit falls from £280 to £240; it would take 56 to match the old profit.